Private equity buys TXU in record deal

By Jessica Hall

PHILADELPHIA (Reuters) - Texas power company TXU Corp. TXU.N said on Monday it agreed to be acquired by a group led by private equity firms Kohlberg Kravis Roberts & Co. KKR.UL and Texas Pacific Group TPG.UL for $31.8 billion in the largest leveraged buyout in history.

The investor group will pay $69.25 per share for TXU, a 15.4 percent premium over TXU's closing stock price of $60.02 on Friday. The previous leveraged buyout record was the $25.1 billion takeover of RJR Nabisco, also by KKR, announced in 1988.

While the company said the deal does not require state regulatory approval, one investor said the state agency would be closely watching the deal. Regulators in Maryland and New Jersey sidelined two large power sector deals last year.

"Somewhere down the road there's going to be a reckoning with the regulators. The regulators will look at that kind of leverage with fairly unsympathetic eyes," said John Olson, who runs hedge funds for Houston Energy Partners.

Shares of TXU added $7.91, or 13.2 percent, to $67.93 in afternoon trading on the New York Stock Exchange. TXU was the second-most active issue on the NYSE.

Power generators are drawing renewed takeover interest as electricity demand in many parts of the country is expected to outstrip generation capacity in the coming years, pushing power prices higher.

Those bullish fundamentals have also boosted the value of power plants, many of which were nearly worthless in the severe market downturn of 2001-2002 when dozens of new plants came on line.

Including debt, the TXU deal is valued at $43.8 billion, according to research firm Dealogic.

The buyout firms are paying 8.5 times EBITDA (earnings before interest, tax, depreciation and amortization) for TXU, compared with an average for the utilities industry of 7.9 times EBITDA, TXU said. That is below the more than 11 times EBITDA that investors agreed to pay for Houston-based pipeline company Kinder Morgan Inc. KMI.N last year.

The 15.4-percent premium being paid compares with the 13-percent premium that power company Duke Energy Corp. (DUK.N) had offered for Cinergy Corp. in 2005. That deal, worth about $9 billion, was completed last year.

In addition to KKR and Texas Pacific Group, equity investors in the company will be GS Capital Partners, Lehman Brothers Holdings Inc. LEH.N, Citigroup (C.N), and Morgan Stanley (MS.N), TXU said.

The deal marks a return to Texas for the buyout firms after unsuccessful efforts to buy utilities, attractive because of their steady cash flow, in other states.

KKR tried to buy Unisource in Arizona and Texas Pacific wanted Portland General in Oregon, but those deals were blocked by state regulators.

Texas Pacific and KKR were part of a consortium that bought Texas Genco, then the second-biggest power generating company in the state, for $3.7 billion in 2004. The consortium later sold Texas Genco to NRG Energy for about $5.8 billion in February 2006.

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