Next Step in TXU Deal Is Backdrop of Conference

Will anyone dare to mount a rival bid for TXU?

That was the question being whispered yesterday in Frankfurt where many of the world’s private equity chiefs were gathered for Super Return, one of the industry’s best-attended gatherings.

Speakers included David Bonderman of the Texas Pacific Group, which helped to lead Monday’s $45 billion TXU takeover; Todd Fisher of Kohlberg Kravis Roberts & Company, the other lead investor in the TXU deal; and Stephen A. Schwarzman of the Blackstone Group, considered one of the most likely candidates to try to crash the TXU sale.

A private equity firm’s effort to break up the TXU deal could be a crucial test of the intertwined relationships that so far have limited all-out brawls. Critics contend that the firms, which frequently partner with one another, have a gentleman’s agreement not to start bidding wars once a deal is struck.

As an illustration of the clubbiness of the private equity business, no private equity firm to date has publicly tried to top an offer from one its rivals. The Justice Department started an informal inquiry into the possibility of collusion at at least four of the big firms — Kohlberg Kravis Roberts; the Carlyle Group; Silver Lake Partners; and Clayton, Dubilier & Rice — last fall.

It is an issue, among many, that has the buyout kings worried. Mr. Bonderman said during his keynote speech that the industry’s image was “something that’s probably on everybody’s mind.”

The industry may have begun to change that with its “green” deal for TXU — among other things, the buyers agreed to scuttle plans for several new coal-fired power plants. A bidding battle over a deal could further change its reputation for mutual back-scratching.

TXU has all the hallmarks of a prize in a private equity tug of war.

The price that Kohlberg Kravis and Texas Pacific agreed to pay — $69.25 a share, representing a 25 percent premium over the average closing price in the 20 days ending Feb. 22 — leaves room for a rival to top it and still make a 20 percent annual return on the deal, analysts said. Investors appear to be betting on a higher bid: shares of TXU closed yesterday at $67.03.

TXU’s current deal allows the company to shop itself around for 50 days. The company was represented by Credit Suisse in its deal, and has hired Lazard to look for new buyers.

And then there is the issue of ego: private equity firms constantly talk about trying to outdo the other for the crown, however temporary, of mounting the largest deal ever.

Blackstone, which held that title until last week with its $39 billion acquisition of Equity Office Properties Trust, is planning to take a look at TXU, people close to the firm said. A spokesman for the firm declined to comment. Mr. Schwarzman did not answer questions about the matter in Frankfurt.

Blackstone appears to have been left out of the deal by Kohlberg Kravis and Texas Pacific. Those three firms, together with Hellman & Friedman, acquired Texas Genco Holdings together in 2004, for $3.65 billion.

The Carlyle Group, which has a long history in the energy sector, is also considering jumping into the process, people close to that firm said. Carlyle would have seemed like a natural buying partner for TXU. Former Secretary of State James A. Baker III, who once worked as an adviser to Carlyle, is advisory chairman to Kohlberg Kravis and Texas Pacific. A spokesman for Carlyle declined to comment.

Anyone considering a rival bid for TXU has some hurdles to clear. The buyers have an impressive roster of political relationships and endorsements from environmental groups.

“And I want to say, ‘God bless this takeover of TXU by the private equity market this week,’ ” Jeremy Rifkin, president of the Foundation on Economic Trends, said yesterday at Super Returns, echoing a view that appears to be shared by regulators.

Just yesterday, Senator John Kerry praised the TXU deal even as he said he would hold a hearing on it, saying, “I’m pleased to see that TXU was open to working with the environmental community and I’d like to see similar cooperation extended in other parts of the country,”

Analysts say, however, that a buyer with a higher offer might win the same endorsements by agreeing to the same environmental plan.

source:www.nytimes.com