NRG rejects increased Exelon bid as too low

NEW YORK (Reuters) - Independent power producer NRG Energy Inc (NRG.N) rejected Exelon Corp's (EXC.N) sweetened hostile bid on Wednesday, saying the $7 billion stock offer was still too low.

But NRG left the door open for talks if Exelon improves its bid, even though the power company has said its current bid is its best and final offer. Shares of NRG rose 4.6 percent in afternoon trading on the New York Stock Exchange, indicating some investors believe the companies can still reach a deal.

NRG said its board had unanimously rejected the Exelon bid, arguing that "it continues to substantially undervalue NRG."

"Their increase very clearly was a welcome step in the right direction, but there still is a lot of distance to cover both in terms of the price and the terms of the offer," NRG Chief Executive David Crane said on a conference call.

Exelon raised its all-stock offer for NRG more than 12 percent last week, citing increased cost savings and NRG's May acquisition of Reliant Energy's (RRI.N) Texas retail power business for the higher value.

It is offering NRG shareholders 0.545 of its shares for every NRG share, representing a current premium of around 13 percent.

"What NRG is doing is leaving itself open to continue to negotiate," said RBC Capital Markets analyst Lasan Johong.

"Crane wants to see Exelon step up to the plate one more time, preferably closer to 0.6 (Exelon shares for every NRG share), before he makes any move toward a final conciliatory gesture," Johong said.

Still, Johong pointed out that Exelon has said that its previous bid was as high as it will go, so there is quite a bit of uncertainty regarding whether it will consider another raised bid.

FACE OFF AT ANNUAL MEETING

Exelon has put a slate of directors up for election at NRG's board at the annual meeting on July 21, which could serve as an endgame for the bid, analysts said.

"Since we find it unlikely that Exelon will raise its offer ... we think the fate of the deal now rests in the hands of NRG shareholders," Wells Fargo analyst Michael Bolte said in a research note.

Bolte said he was skeptical NRG shareholders will elect the Exelon slate.

"If Exelon loses that vote and truly has no intention to raise its offer, we think it might finally decide to give up," he said.

Both parties have argued that the election will be a referendum on the bid, and Exelon is meeting with NRG shareholders this week in an effort to build support.

"This latest rejection should raise concerns for NRG shareholders," Exelon said in a statement. "In the absence of Exelon's offer, it is likely that NRG's stock would trade closer to the stock prices of its independent power producer peers, which is substantially below its current share price."

ROAD MAP TO INCREASE?

NRG's Crane said in an interview that in order to open a dialogue, Exelon should increase its bid "at least to acknowledge the value accretion we've achieved."

"In our presentation we give them a road map for three different ways they can get to double-digit increases: Reliant retail, nuclear and a fair sharing of the synergies that they themselves have found," Crane said.

NRG argued that Exelon underestimated the value created by its recent acquisition of the Texas retail business, which it says is worth more than four times as much as Exelon believes.

It said its nuclear business, which is a frontrunner among U.S. companies vying to develop new nuclear plants, and its cost savings program also create more value than acknowledged in the bid.

The independent power producer raised its full-year forecast for adjusted EBITDA by $325 million to $2.5 billion, primarily due to the Reliant acquisition, which it says will generate $400 million of EBITDA in 2009.

It also boosted its 2009 estimate for cash flow from operations by $200 million to $1.675 billion, and increased the authorization for its share buyback plan to $500 million from $330 million.

Shares of NRG rose $1.02, or 4.6 percent, to $23.10 in afternoon trading, while Exelon shares rose 25 cents, or 0.5 percent, to $48.

(Reporting by Michael Erman; Editing by Lisa Von Ahn, Maureen Bavdek and Matt Daily)