TXU Accepts KKR, Texas Pacific Buyout, People Say

TXU Corp., the biggest power producer in Texas, accepted a $44 billion buyout led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group, people familiar with the deal said.

TXU's board today approved the group's offer of between $69 and $70 a share, or almost $10 more than the closing stock price at the end of last week, said the people, who asked not to be named because the deal hasn't been announced. The buyers will also assume about $12 billion in debt.

The takeover, if completed, would be the largest-ever by a private-equity firm. KKR founders Henry Kravis and George Roberts held that title until earlier this month when Stephen Schwarzman's Blackstone Group LP bought Equity Office Properties Trust, the largest U.S. owner of office buildings, for $39 billion including debt.

TXU ``turned into a good cash machine,'' said Perry Sioshansi, president of Menlo Energy Economics, a consulting firm in Walnut Creek, California. Natural gas prices that more than tripled in this decade have increased power prices in Texas, making TXU's coal and nuclear plants more valuable. ``Deregulation in Texas gave TXU and other players generous ways to raise rates,'' he said.

Lisa Singleton, a spokeswoman for Dallas-based TXU, didn't respond to a request for comment. Mark Semer, a KKR spokesman, and Owen Blicksilver, a representative for Texas Pacific, declined to comment.

Lehman, Morgan Stanley

KKR and Texas Pacific will spend $5 billion on the deal, and four investment banks, including Lehman Brothers Holdings Inc. and Morgan Stanley, will put up another $3.5 billion, the people said. The rest of the purchase price will be made up with borrowed money.

Spokeswomen Torie von Alt at Lehman and Marie Ali at Morgan Stanley declined to comment. Both banks are based in New York.

TXU Chief Executive Officer C. John Wilder will have a small slice of the equity investment and will continue to run the company, the people said. Wilder, 48, has overseen an almost fivefold gain in TXU shares since taking over in February 2004. Wilder has returned TXU, which was near bankruptcy in 2002 after a failed overseas expansion, to a focus on electric generation and distribution in the Dallas region.

TXU will have 50 days in which it will be allowed to consider any other offer for the company, the people said.

While it's not unusual for executives to join in the buyout of their companies, it has caused some shareholders and regulators to question whether managers use their influence with directors to keep the price down. Some buyout agreements include a so-called go-shop provision that allows directors to consider rival bids.

Climate Change Deal

Before TXU, Wilder was chief financial officer at Entergy Corp., the New Orleans based utility owner.

In August, an investment group led by Richard Kinder, cofounder of Houston-based Kinder Morgan Inc., sweetened its offer for the pipeline company by 7.5 percent to $15 billion after some shareholders balked at the initial price. His partners were American International Group Inc., Goldman Sachs Group Inc., Carlyle Group and Riverstone Holdings LLC.

To help gain approval for the transaction, TXU and its buyers are agreeing to abandon eight of 11 coal-fired generators the company planned to build and support mandatory U.S. limits on power-plant pollution that contributes to global warming.

The Natural Resources Defense Council and Environmental Defense negotiated with the buyout firms and with Goldman Sachs, which is advising on and financing the transaction, in the past two weeks. The company also will devote $400 million to cutting power demand in Texas, pleasing those who favor conservation over new plant construction.

Cleaner Energy

``The new owners don't want to be your grandfather's power company,'' said David G. Hawkins, director of the Natural Resources Defense Council's Climate Center. They will ``turn instead to cleaner sources of energy,'' he said yesterday in a phone interview.

Wilder's power plant expansion aimed to give the company more low-cost power to sell in the state's deregulated wholesale market as power needs jumped in the coming decade. The prospect of increased pollution that could make smog worse in Houston and Dallas, and emissions of carbon dioxide, stirred opposition among environmentalists and mayors in the state.

Two proposed buyouts of utilities have failed in recent years, and two of the largest U.S. utility mergers have also been undone by opposition from state regulators and politicians.

Failed Buyouts

Arizona state officials in December 2004 rejected the sale of UniSource Energy Corp., owner of the state's second-biggest utility, to a partnership backed by New York-based Kohlberg Kravis, J.P. Morgan Partners LLC and Wachovia Capital Partners.

Oregon in March 2005 rejected a purchase of Portland General Electric by Fort Worth, Texas-based Texas Pacific.

Closely held buyout firms such as KKR use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance their deals. They typically seek to expand or improve performance before selling within five years to other funds or investors in initial public offerings.

The planned $17.8 billion takeover of Newark, New Jersey- based Public Service Enterprise Group Inc. by Chicago-based Exelon Corp. was abandoned on Sept. 14 after New Jersey's Board of Public Utilities demanded concessions on rates that the companies were not willing to make.

FPL, Constellation

FPL Group Inc.'s planned $12.4 purchase of Constellation Energy Group Inc., owner of Baltimore's utility, was dropped in October after Maryland politicians concerned over rising electricity rates threatened a protracted review. FPL is based in Juno Beach, Florida, and owns the state's largest utility.

Constellation and Public Service Enterprise Group both trade at a higher price compared with this year's expected earnings. Shares of Constellation, based in Baltimore, trade at 16.6 times forecast 2007 profit, while Public Service as a price-to-earnings ratio of 15.4.

The valuation of utilities can be complicated by varied state regulatory schemes and differences in business strategies.

TXU is the largest power producer in Texas with more than 18,300 megawatts and the largest electricity retailer in the state, selling power to more than 2.2 million homes and businesses.

Buyout Boom

The largest LBO before Equity Office was the $33 billion purchase in November of hospital chain HCA Inc. by Bain Capital LLC, Kohlberg Kravis, Merrill Lynch & Co. and HCA co-founder Thomas F. Frist Jr. That topped the $31.3 billion that Kohlberg Kravis paid in 1989 for RJR Nabisco Inc.

Five of the 10 largest acquisitions announced last year were by buyout firms. In four of those deals, there were two or more co-bidders.

Private-equity firms announced a record of more than $700 billion in takeovers last year and almost $50 billion so far this year, Bloomberg data show. Investors, seeking returns that exceed stocks and bonds, poured $432 billion into buyout funds last year, also a record, according to London-based Private Equity Intelligence Ltd.

KKR has raised $16.1 billion for a new U.S. buyout fund and expects to reach its cap of $16.6 billion, a person familiar with the matter said Jan. 11.

TXU's biggest rival in the race to build new generation in Texas is NRG Energy Inc., which bought a Texas power company called Texas Genco from a group of buyout firms including Texas Pacific and Kohlberg Kravis in 2005 for $5.8 billion.

TXU shares gained $2.38, or 4.1 percent, to $60.02 in New York Stock Exchange composite trading on Feb. 23, the biggest one-day gain in more than nine months. The merger was first reported after exchanges closed, and the shares jumped another $10 in after-hours trading.

source:www.bloomberg.com