Greater FreeDumb for all Coming Your Way
NYT February 24, 2007
At $45 Billion, New Contender for Top Buyout
By ANDREW ROSS SORKIN and CLIFFORD KRAUSS
The biggest leveraged buyout ever is about to be surpassed. Again.
A group led by the private equity giants Kohlberg Kravis Roberts & Company and the Texas Pacific Group is near a deal to acquire the TXU Corporation, a Texas utility, for about $45 billion, according to people involved in the talks.
The amount of private money that is being offered is a huge financial endorsement of the company’s energy strategy. TXU has irritated environmental advocates by proposing to build 11 coal-fired power plants in Texas. Despite calls for regulating greenhouse gases, TXU has been the most aggressive in the power industry in pushing coal as the answer to growing electricity demands. Nationwide, power companies are planning to build about 150 coal plants over the next several years.
The deal itself, if approved at a TXU board meeting tomorrow, would be a landmark. It would exceed the Blackstone Group’s recent $39 billion acquisition of the office landlord Equity Office Properties, the largest buyout ever. And that would mean that Henry R. Kravis, a co-founder of Kohlberg Kravis Roberts, has managed to upstage, at least for the time being, his longtime rival in deals, Stephen A. Schwarzman, a co-founder of Blackstone.
Energy has been fairly recent territory for private equity. While energy deals accounted for 16 percent of all mergers last year, only 9 percent of those deals involved buyout firms, according to Thomson Financial. The first big foray came last year, when Kinder Morgan, the Texas pipeline giant that was created from some assets of the former Enron, was sold to a group that included Goldman Sachs, the American International Group, the Carlyle Group and Riverstone Holdings for $27.5 billion.
Awash in hundreds of billions of dollars, private equity firms, which raise money from pension funds and wealthy individuals, have taken on new targets in a buying spree. In 2006, private equity firms raised more than $174 billion for 205 funds, according to Thomson Financial.
Having just finished raising new supersize funds — K.K.R. and Blackstone are about to complete funds each worth more than $20 billion — and with banks and hedge funds willing to lend them money in record amounts with few restrictions or covenants, private equity has now begun to aim at even bigger prey. A deal the size of TXU will probably require that the private equity firms raise more than $30 billion in debt.
People involved in the talks cautioned that the deal still faced approval by TXU’s board and several negotiating points remained, so the talks could collapse.
TXU did not respond to telephone requests for comment.
“It’s a pretty dramatic development because TXU’s position in electricity in Texas is controversial and uncertain,” said Amy Myers Jaffe, an energy expert at the James A. Baker III Institute for Public Policy at Rice University in Houston.
TXU, based in Dallas, has 2.4 million customers in the state. It also owns and operates one of the largest lignite coal surface mining operations, producing 23 million tons a year. With its large, low-cost nuclear and coal-fired group of plants, it has been able to raise electricity prices to match the rise in natural gas prices the last three years.
Like other utility companies in recent years, TXU has sought to reinvent itself. A new management came in three years ago and sold natural gas assets after the price of natural gas soared, got out of speculative marketing, cleaned up its books and went back to its core business of electricity generation and transmission. The company’s shares have been a favorite of Wall Street, rising from a low of $5.44 in 2002 to $60.02 yesterday.
But after being on the rise, the company has now hit strong headwinds. TXU’s plans to build 11 coal-fired plants have faced increasing political opposition from environmental organizations, civic groups and prominent politicians like the mayor of Dallas, Laura Miller.
Rallies, hearings and informational meetings have been attracting crowds of critics around the state who view the plants as a symbol in the struggle to reduce global warming. Environmentalists believe if they can stop at least some of the plants in a conservative state like Texas, it will be a boon to activists around the country who oppose coal and favor renewable energy like solar and wind.
TXU has said that the growing population and economy in Texas need more energy and has claimed that the plants will be cleaner than many older coal-fired plants in the state. They have also argued that coal gasification technologies, which environmentalists say would produce cleaner energy, are not yet ready for the marketplace. The 11 plants would have a capacity of more than 9,000 megawatts, about 3.5 percent of the nation’s current coal-fired power and would cost an estimated $10 billion.
Recently, in response to criticism, TXU promised that the new plants would leave vacant space for future deployment of equipment designed to capture carbon dioxide so the climate-warming gas does not enter the atmosphere. Moreover, the company says it is conducting research on oxygen firing, chilled ammonia and other technologies to capture carbon.
TXU’s plan was dealt a sharp blow, at least for the short term, by State District Judge Stephen Yelenosky, who on Tuesday ruled against a 2005 executive order by Gov. Rick Perry to put the plants’ permit process on a regulatory fast-track. The judge issued a temporary injunction stating that the Texas governor, whose powers are limited compared with most state governors, did not have the authority to decide how much time regulatory agencies should take before issuing decisions.
The Texas Commission on Environmental Quality will make the ultimate decision on the permits, but not before administrative law hearings that promise to be rancorous.
Still, despite the uproar over the coal plants, TXU has many attractions for a potential buyer, analysts said. It is a strong company in a profitable business made all the more valuable because it operates in Texas, which has a growing economy and population base.
“Utilities right now have a lot of value because they have guaranteed cash flows and guaranteed rates of return which gives them guaranteed income,” said Barbara Shook, an analyst with the Energy Intelligence Group, a publications and research firm. “And they have hard assets. In the post-Enron world, hard assets carry a lot of value.”
“TXU is going to grow no matter what, because the state of Texas is growing and that translates into higher demand for electricity,” she added.
The Texas energy scene is evolving. Still the center of the nation’s oil business, it is also now the state with the most wind power production. Austin and other cities have become centers for renewable energy companies. But unlike California, Texas has been slow to develop conservation policies and has no goals for cutting carbon emissions.
Under the terms of the deal being discussed, the investors would pay about $70 a share for TXU, these people said. TXU’s market value is about $27.5 billion. The company has more than $12 billion in debt.
Other private equity firms may join the group, these people said. A spokeswoman for K.K.R. declined to comment as did a spokesman for Texas Pacific.
Michael J. de la Merced contributed reporting.
At $45 Billion, New Contender for Top Buyout
By ANDREW ROSS SORKIN and CLIFFORD KRAUSS
The biggest leveraged buyout ever is about to be surpassed. Again.
A group led by the private equity giants Kohlberg Kravis Roberts & Company and the Texas Pacific Group is near a deal to acquire the TXU Corporation, a Texas utility, for about $45 billion, according to people involved in the talks.
The amount of private money that is being offered is a huge financial endorsement of the company’s energy strategy. TXU has irritated environmental advocates by proposing to build 11 coal-fired power plants in Texas. Despite calls for regulating greenhouse gases, TXU has been the most aggressive in the power industry in pushing coal as the answer to growing electricity demands. Nationwide, power companies are planning to build about 150 coal plants over the next several years.
The deal itself, if approved at a TXU board meeting tomorrow, would be a landmark. It would exceed the Blackstone Group’s recent $39 billion acquisition of the office landlord Equity Office Properties, the largest buyout ever. And that would mean that Henry R. Kravis, a co-founder of Kohlberg Kravis Roberts, has managed to upstage, at least for the time being, his longtime rival in deals, Stephen A. Schwarzman, a co-founder of Blackstone.
Energy has been fairly recent territory for private equity. While energy deals accounted for 16 percent of all mergers last year, only 9 percent of those deals involved buyout firms, according to Thomson Financial. The first big foray came last year, when Kinder Morgan, the Texas pipeline giant that was created from some assets of the former Enron, was sold to a group that included Goldman Sachs, the American International Group, the Carlyle Group and Riverstone Holdings for $27.5 billion.
Awash in hundreds of billions of dollars, private equity firms, which raise money from pension funds and wealthy individuals, have taken on new targets in a buying spree. In 2006, private equity firms raised more than $174 billion for 205 funds, according to Thomson Financial.
Having just finished raising new supersize funds — K.K.R. and Blackstone are about to complete funds each worth more than $20 billion — and with banks and hedge funds willing to lend them money in record amounts with few restrictions or covenants, private equity has now begun to aim at even bigger prey. A deal the size of TXU will probably require that the private equity firms raise more than $30 billion in debt.
People involved in the talks cautioned that the deal still faced approval by TXU’s board and several negotiating points remained, so the talks could collapse.
TXU did not respond to telephone requests for comment.
“It’s a pretty dramatic development because TXU’s position in electricity in Texas is controversial and uncertain,” said Amy Myers Jaffe, an energy expert at the James A. Baker III Institute for Public Policy at Rice University in Houston.
TXU, based in Dallas, has 2.4 million customers in the state. It also owns and operates one of the largest lignite coal surface mining operations, producing 23 million tons a year. With its large, low-cost nuclear and coal-fired group of plants, it has been able to raise electricity prices to match the rise in natural gas prices the last three years.
Like other utility companies in recent years, TXU has sought to reinvent itself. A new management came in three years ago and sold natural gas assets after the price of natural gas soared, got out of speculative marketing, cleaned up its books and went back to its core business of electricity generation and transmission. The company’s shares have been a favorite of Wall Street, rising from a low of $5.44 in 2002 to $60.02 yesterday.
But after being on the rise, the company has now hit strong headwinds. TXU’s plans to build 11 coal-fired plants have faced increasing political opposition from environmental organizations, civic groups and prominent politicians like the mayor of Dallas, Laura Miller.
Rallies, hearings and informational meetings have been attracting crowds of critics around the state who view the plants as a symbol in the struggle to reduce global warming. Environmentalists believe if they can stop at least some of the plants in a conservative state like Texas, it will be a boon to activists around the country who oppose coal and favor renewable energy like solar and wind.
TXU has said that the growing population and economy in Texas need more energy and has claimed that the plants will be cleaner than many older coal-fired plants in the state. They have also argued that coal gasification technologies, which environmentalists say would produce cleaner energy, are not yet ready for the marketplace. The 11 plants would have a capacity of more than 9,000 megawatts, about 3.5 percent of the nation’s current coal-fired power and would cost an estimated $10 billion.
Recently, in response to criticism, TXU promised that the new plants would leave vacant space for future deployment of equipment designed to capture carbon dioxide so the climate-warming gas does not enter the atmosphere. Moreover, the company says it is conducting research on oxygen firing, chilled ammonia and other technologies to capture carbon.
TXU’s plan was dealt a sharp blow, at least for the short term, by State District Judge Stephen Yelenosky, who on Tuesday ruled against a 2005 executive order by Gov. Rick Perry to put the plants’ permit process on a regulatory fast-track. The judge issued a temporary injunction stating that the Texas governor, whose powers are limited compared with most state governors, did not have the authority to decide how much time regulatory agencies should take before issuing decisions.
The Texas Commission on Environmental Quality will make the ultimate decision on the permits, but not before administrative law hearings that promise to be rancorous.
Still, despite the uproar over the coal plants, TXU has many attractions for a potential buyer, analysts said. It is a strong company in a profitable business made all the more valuable because it operates in Texas, which has a growing economy and population base.
“Utilities right now have a lot of value because they have guaranteed cash flows and guaranteed rates of return which gives them guaranteed income,” said Barbara Shook, an analyst with the Energy Intelligence Group, a publications and research firm. “And they have hard assets. In the post-Enron world, hard assets carry a lot of value.”
“TXU is going to grow no matter what, because the state of Texas is growing and that translates into higher demand for electricity,” she added.
The Texas energy scene is evolving. Still the center of the nation’s oil business, it is also now the state with the most wind power production. Austin and other cities have become centers for renewable energy companies. But unlike California, Texas has been slow to develop conservation policies and has no goals for cutting carbon emissions.
Under the terms of the deal being discussed, the investors would pay about $70 a share for TXU, these people said. TXU’s market value is about $27.5 billion. The company has more than $12 billion in debt.
Other private equity firms may join the group, these people said. A spokeswoman for K.K.R. declined to comment as did a spokesman for Texas Pacific.
Michael J. de la Merced contributed reporting.
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