February 27, 2007 / 12:52 AM / 13 years ago

Private equity buys TXU in record deal

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 TXU Monticello Steam Electric Station power plant is seen near Mt. Pleasant, Texas February 26, 2007. REUTERS/Mike Stone

The 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, completed in 1989.

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

The TXU deal could meet with resistance from politicians and environmentalists over rates and plans to build coal-fired power plants even though TXU has said it would cut the number of planned coal-fueled plants to 3 from 11 and implement 10 percent price cuts to save the average Texas household about $250 a year. The acquisition needs support of the state legislature,

“I’m not in favor of it. It’s not in the best interests of Texans,” said Texas Rep. Sylvester Turner of Houston, who added that Texas legislators should stop the deal.

“Private equity firms are not in the business of running companies for the long term,” Turner said. “They make an investment, make it attractive, then flip it.”

Coal-fired plants are among the United States’ largest emitters of carbon dioxide, which many scientists say is a major contributor to global warming.

“The war is far from over,” Tom Smith, director of the Texas office of advocacy group Public Citizen, told reporters on a conference call.

TXU said the deal, which faces an approval process of 6 to 9 months with the Nuclear Regulatory Commission, is expected to close in the second half of 2007.

While TXU said the acquisition does not need state regulatory approval, one investor said the Texas Public Utility Commission would closely watch it. Regulators in Maryland and New Jersey sidelined two 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.

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

Utilities are attractive because of their steady cash flow.

Shares of TXU closed up $7.91, or 13.2 percent, at $67.93 on the New York Stock Exchange. It was the second-most active issue on the NYSE.


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

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

TXU said the group was 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.

Investors agreed to pay more than 11 times EBITDA for Houston-based pipeline company Kinder Morgan Inc. (KMI.N) last year.

The premium being paid for TXU compares with a 13 percent premium offered by power company Duke Energy Corp.(DUK.N) for Cinergy Corp. in 2005. That deal, worth about $9 billion, was completed in 2006.

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

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


TXU has been battling environmentalists and others who are trying to prevent it from more than doubling the number of coal-fired power plants it has in Texas.

TXU and its prospective buyers have pledged to improve the company’s environmental policies, including not building most of the planned coal-powered plants.

TXU said scaling back coal-plant expansion would prevent 56 million tons of annual carbon emissions. The company said it would also invest $400 million in conservation and energy efficiency over the next five years.

Shares of energy-services company McDermott International Inc. MDR.N closed down 3.69 percent at $49.32 on concerns the company might lose business. Last year, McDermott’s Babcock & Wilcox unit won a contract to provide coal-fired boilers and other equipment for TXU.

The deal has won the nod of the Environmental Defense Fund and Natural Resources Defense Council.

It was a “very smart move on their part to have talked in advance with environmental groups,” said Barry Abramson, a utility analyst with Gabelli Asset Management Inc., which owns shares of TXU.

But Michael Brune, executive director of Rainforest Action Network said: “As far as TXU goes, we think they haven’t gone far enough. If you are really serious about climate change, you would not consider building new coal plants.”


TXU may solicit proposals from other parties through April 16. If it accepts a higher offer during that time, it must pay a breakup fee of $375 million. If it accepts a higher bid after April 16, it must pay a $1 billion breakup fee, or about 3.14 percent.

TXU said last year it considered an asset swap with Exelon Corp. EXC.N and weighed splitting up its regulated electric delivery business and its unregulated power business.

TXU said members of management, including Chairman and Chief Executive John Wilder, have made no commitments to stay if the deal goes through. Wilder said during a conference call with analysts that this would be one less barrier to any superior offer because he is not wedded to the current deal.

Since Wilder became CEO of TXU in 2004, he helped the utility cut costs, reduce debt and sell assets in Texas and Australia. Under his tenure, TXU’s stock has risen from $27.

One TXU shareholder said the bidders had clearly worked hard to structure the deal to overcome any regulatory hurdles or shareholder objections, which would help scare off rival suitors.

“There are enough political land mines in this thing that I would doubt” there would be a rival bid, said James Halloran, an analyst with National City Private Client Group, which owns 15,000 shares of TXU. “And I can’t see any shareholder revolt on this.”

Credit Suisse Securities and Lazard acted as financial advisers to TXU. Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley acted as financial advisers to the investor group.

Additional reporting by Caroline Humer, Lisa Lee, Matt Daily and Timothy Gardner in New York, and Anna Driver and Eileen O'Grady in Houston

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