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PHILADELPHIA - Texas power company TXU agreed to be acquired by a group led by private equity firms Kohlberg Kravis Roberts and Texas Pacific for US$31.8 billion ($44.8 billion) in the largest leveraged buyout in history.
The group will pay US$69.25 a share for TXU, a 15.4 per
cent premium over TXU's closing stock price of US$60.02 on Friday.
The previous leveraged buyout record was the US$25.1 billion takeover of RJR Nabisco, also by KKR, completed in 1989.
Including debt, the TXU deal is valued at US$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-fuelled plants to 3 from 11 and implement 10 per cent price cuts to save the average Texas household about US$250 a year.
The acquisition needs support of the state legislature.
"I'm not in favour of it. It's not in the best interests of Texans," said Texas Representative 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," said Tom Smith, director of the Texas office of advocacy group Public Citizen.
TXU said the deal, which faces an approval process of six to nine 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 US$7.91, or 13.2 per cent, at US$67.93 on the New York Stock Exchange.
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 lifted 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.
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 US$3.7 billion. The consortium later sold Texas Genco to NRG Energy for about US$5.8 billion in February 2006.
- REUTERS
