Private equity buys TXU in record deal
PHILADELPHIA – Texas power company TXU Corp. 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 deal tops the previous leveraged buyout record, the $25.1 billion takeover of RJR Nabisco, also by KKR, announced in 1988.
“It seems like a normal offer. What’s mind-boggling is that it’s being done by private equity,” said Daniele Seitz, an analyst at Dalhman Rose, who has a “hold” rating on the stock.
Shares of TXU were at $68.20 in midday trading on the New York Stock Exchange, after rising to $68.33.
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, taxes, depreciation and amortization) for TXU, which tops the industry average of 7.9 times EBITDA, TXU said.
In addition to KKR and Texas Pacific Group, equity investors in the company will be GS Capital Partners, Lehman Brothers Holdings Inc., Citigroup, and Morgan Stanley, 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 in both cases state regulators blocked the deals.
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.
TXU has been battling with environmentalists and others who have been trying to prevent the company from more than doubling its fleet of coal-fired power plants in Texas.
The acquisition has received the blessing of the Environmental Defense Fund and Natural Resources Defense Council as TXU and its buyers made several pledges to improve the company’s environmental policies, including not building most of the plants.
Under the agreement, TXU said it would cut the number of planned coal-fueled generation plants to three from 11, and implement 10 percent price cuts that would result in annual savings of about $250 a year for the average household.
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.
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 last year said it considered an asset swap with rival Exelon Corp. and also 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 with the company should the planned takeover go through.
That would leave management open in the case a superior offer emerged, Wilder said during a conference call with analysts and reporters.
Since Wilder became CEO of TXU in 2004, he helped the utility cut costs, reduce its debt load, 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 from trying to bid for TXU.
“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.”
The deal does not need approval from the Public Utility Commission of Texas, TXU said, but is subject to approval by the legislature.
The offer has an “attractive premium in the point of view that the company was at an impasse as their growth was dependent on the construction program,” Seitz said. There’s “not too much visibility on how the company will be able to establish growth, especially if there is a slowdown in their construction program.”
The plan to scale back coal-plant expansion will prevent 56 million tons of annual carbon emissions, TXU said. The company also will invest $400 million in conservation and energy efficiency activities over the next five years, TXU said.
TXU recruited a number of high-profile names to advise the company. Former U.S. Secretary of State James Baker will serve as advisory chairman to the investment group of new owners. William Reilly, chairman emeritus of the World Wildlife Fund and former Environmental Protection Agency Administrator, will join TXU’s board.
TXU said the deal is expected to close in the second half of 2007. There is no financing contingency to the transaction.
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.