A group of private-equity firms are in the process of purchasing Texas utility giant TXU Corp. in a $32 billion deal that, if approved, would be the largest leveraged buyout in U.S. corporate history.
The purchasers are a group of investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group. The deal is a result of two powerful economic realities: The low cost of capital — which makes money more readily available for ever-larger buyouts — and the huge profits being reaped these days by giant energy companies.
Former EPA Administrator William Reilly, a partner in Texas Pacific, calls the deal "history-making."
"Texas — in particular the market area served by TXU — is a fast-growing area of the country," Reilly says. "It's increasing its energy use. The company has responded to that energy use very successfully. I think the market history for the company reflects that."
TXU is in the midst of a bruising battle over its proposal to build 11 new coal plants in Texas. Among those opposed to the proposal are environmentalists, dozens of Texas mayors, and ranchers and farmers who fear that it could worsen the state's existing air-pollution problems. Reilly helped broker a deal that won the critical support of environmentalists. In exchange, the investors agreed to scrap plans for eight of the 11 plants.
Henry Kravis, a founding partner of KKR, one of the lead investors behind the deal, called the compromise the "responsible" thing to do.
"I think it became clear to all of us as investors that, were we to do anything significant in energy in Texas or anywhere else — given the climate today, given the attitude towards the environment — we had to do it responsibly," he said. "And we wanted to do it in concert with some of the most authoritative and involved environmental groups, who understand this issue and care deeply about it."
The deal announced Monday has the support of the Natural Resources Defense Council and the Environmental Defense Fund.
Still, the proposed acquisition has several hurdles to clear. Shareholders and regulators will have to sign off on it. And TXU will have 50 days to seek rival bids. A bidding war could develop as other private-equity firms eye the opportunity.
Dallas-based TXU has agreed to be acquired by an investment group led by private-equity firms Texas Pacific Group and Kohlberg Kravis Roberts.
Some news sources say the deal is valued at $45 billion, others say $32 billion. The higher value includes the amount of TXU debt that the buyers would take on. Subtract the debt and you arrive at a still-significant $32 billion payment, making the TXU deal the largest-ever private-equity deal — even with the debt excluded.
Joining the private-equity firms in the acquisition of TXU are Goldman Sachs Group, Morgan Stanley, Citigroup Inc. and Lehman Brothers Holdings Inc.
The investors will pay TXU shareholders $69.25 a share. That's a 15 percent premium to TXU's closing price on Friday.
In order to win regulatory approval, TXU's new ownership has promised to scrap eight of the 11 coal-fired electric power plants that the utility had planned to build. The private-equity firms worked with the Environmental Defense Fund and the Natural Resources Defense Council in order to gain their endorsements.
The cancellation of eight coal-fired power plants will prevent additional annual carbon emissions of 56 million tons, according to TXU's statement.
TXU is also pledging to support a mandatory cap and trade program aimed at regulating carbon emissions.
The new owners have promised to cut electricity rates by 10 percent. That adds up to $300 million of annual savings for residential consumers, according to a statement on TXU's Web site. This "price protection," as the company calls it, is good only through September 2008.
The proposed buyout still has to be approved by state regulatory officials and by TXU shareholders. Either one could prevent the deal from happening.
TXU will have 50 days to see rival bids. A bidding war could develop as other private-equity firms eye the opportunity.