KKR, Texas Pacific Will Acquire TXU for $45 Billion
Feb. 26 (Bloomberg) -- Investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group will buy TXU Corp., the largest power producer in Texas, for $45 billion in the biggest- ever leveraged buyout.
KKR, run by Henry Kravis and George Roberts, and David Bonderman's Texas Pacific, joined by Goldman Sachs Group Inc., will pay $69.25 for each TXU share, 15 percent more than the closing stock price on Feb. 23, the companies said today in a statement. About $12 billion in debt will be assumed, TXU spokeswoman Lisa Singleton said.
Kravis and Roberts, both 63, upended the buyout world in 1989 with their $31 billion purchase of food- and tobacco-maker RJR Nabisco Inc. It was the largest LBO ever and remained so until November, when KKR joined in the $33 billion buyout of hospital chain HCA Inc. That deal was topped this month by Blackstone Group's takeover of Equity Office Properties Trust, the biggest U.S. owner of office buildings, for $39 billion.
``The general availability of money is driving all of these transactions higher and higher,'' said Todd Richey, a former investment banker with Banc of America Securities who now teaches finance at the University of California at Irvine's business school. ``Occasionally, there's hubris or irrational exuberance, but with the low cost of capital right now, there's lots of opportunities for big deals to be successful.''
Cash, Debt
The investors are providing $8.5 billion in cash and the rest of the deal will be debt, according to people familiar with the matter. The buyout firms will put up $5 billion and Goldman Sachs is investing $1.5 billion, according to three people who asked not to be named.
Lehman Brothers Holdings Inc. will invest $1 billion, Citigroup Inc. $700 million, and Morgan Stanley $300 million, according to the people.
Credit-default swaps on TXU debt soared, signaling that investors now consider the debt to be riskier. Contracts based on $10 million of TXU debt doubled today to $170,000, according to CMA Datavision in London. Credit-default swaps, which are based on corporate bonds, are used to speculate on a company's ability to repay debt.
Moody's Investors Service said it's reviewing the Ba1 rating on TXU senior unsecured debt for a possible downgrade on concern that the company's financial profile ``will experience a significant increase in leverage'' from the takeover. The rating already is one notch below investment grade.
Shares of TXU surged $7.98, or 13 percent, to $68 at 12:05 p.m. in New York Stock Exchange composite trading. That's a more than fivefold increase since Chief Executive Officer C. John Wilder took over in February, 2004. The buyout was first reported after the market closed on Feb. 23.
Breakup Fee
TXU can solicit rival bids through April 16. A breakup fee of $375 million for accepting a superior offer by that time will increase to $1 billion after April 16, according to a public filing today.
``It's very likely that there's going to be interest,'' Wilder said today on a conference call. ``It's also very likely that if an investor group wanted to make a serious proposal that there would be the access to capital that they would need to pull this transaction off.''
Credit Suisse Securities and Lazard Ltd. advised TXU in connection with the transaction. Goldman Sachs, Citigroup, JPMorgan Chase & Co., Lehman and Morgan Stanley advised the buyout group.
Bankruptcy Brush
The company, after almost going bankrupt in 2002 because of a failed overseas expansion, has rebounded and may earn $2.6 billion in 2006, up 51 percent from a year earlier, according to the average of six analyst estimates compiled by Bloomberg. He
Wilder returned TXU to a focus on electric generation and distribution in the Dallas region. Natural-gas prices that more than tripled this decade have raised Texas power prices, making TXU's coal and nuclear plants more valuable.
The plants can produce more than 18,100 megawatts, and the company is also the largest electricity retailer in the state, selling power to more than 2.1 million homes and businesses. TXU owns a transmission business that could be sold to pay off debt used to fund the LBO.
TXU ``turned into a good cash machine,'' said Perry Sioshansi, president of Menlo Energy Economics, a consulting firm in Walnut Creek, California.
Rate Cut
TXU said it will cut electricity rates by 6 percent within 30 days for residential customers who have not selected cheaper options from other power providers and another 4 percent after the expected closing in the second half of the year.
Closely held LBO firms 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 companies or improve performance before selling them within five years.
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.
Environmental Groups
The buyout firms and Goldman approached the Natural Resources Defense Council and Environmental Defense over the past two weeks to negotiate the power plant agreement and gain support for the transaction. TXU also will devote $400 million to cutting power demand in Texas.
Wilder's power plant expansion aimed to give the company more low-cost power to sell in the state's deregulated wholesale market. 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.
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 KKR along with J.P. Morgan Partners LLC and Wachovia Capital Partners. Oregon in March 2005 rejected a purchase of Portland General Electric by Texas Pacific.
Earlier Buyouts
KKR, based in New York, and Texas Pacific of Fort Worth, Texas, have been partners on earlier utility buyouts. In July 2004, the firms were part of a group that bought Houston-based Texas Genco Holdings Inc. for $3.65 billion. They sold the company, the second-largest power generator in Texas, to NRG Energy Inc. for $5.8 billion in February 2006.
Buyout firms announced a record of more than $700 billion in takeovers last year, and almost $50 billion so far this year, according to data compiled by Bloomberg. Investors, seeking returns that exceed stocks and bonds, poured a $432 billion into private-equity funds last year, also a new high, according to London-based Private Equity Intelligence Ltd.
That money is increasingly going into bigger deals. The average price of the 10 largest buyouts stood at $25.5 billion before the TXU deal was announced, Bloomberg data show. KKR, Blackstone, Texas Pacific, Carlyle Group and Bain Capital LLC each had a role in two of those transactions.
KKR, founded in 1976, is almost done gathering $16.6 billion for its latest U.S. fund. Past investments include Toys ``R'' Us Inc., Sungard Data Systems Inc. and VNU Group BV.
Texas Pacific was founded in 1992 by Bonderman, 64, James Coulter, 47, and Bill Price, 50. It raised $15 billion last year. It has invested in about 75 companies, including Burger King Corp. and Continental Airlines Inc.
