The investors buying TXU Corp. say they can finance the biggest private-takeover ever, cut electricity rates, cancel new power plants — and still make money.
Kohlberg Kravis Roberts & Co. and Texas Pacific Group believe they can do this, most obviously, because TXU is the largest electricity producer in a big state that is expected to keep growing at a fast clip.
They also believe that as private-equity firms, they can be patient. They can spend money upfront and wait for a return on their investment without answering to public shareholders who demand quarter after quarter of rising profits.
"We are investing heavily, but we are also redirecting the company," said Michael MacDougall, a partner at Texas Pacific. "We think it will pay off in the long run for all the stakeholders in Texas."
TXU announced Monday that its directors agreed to a $32 billion sale to a group led by KKR and Texas Pacific and also including Goldman Sachs, Lehman Brothers, Citigroup and Morgan Stanley. The firms will pay $69.25 per share, a 15 percent premium over TXU's closing share price on Friday, and they will assume more than $12 billion in debt.
The announcement sent TXU shares to a 52-week high of $68.45 before they closed at $67.93, up $7.91, or 13.2 percent in trading on the New York Stock Exchange.
Dallas-based TXU can listen to other offers until mid-April, but if a better one comes along, KKR and Texas Pacific will have a chance to trump the bid.
The investors courted consumers and environmentalists to win support for their move.
For Texans weary of high electric bills, they promised to cut rates by 10 percent and freeze those prices until September 2008. TXU said residential customers would save $300 million per year.
Despite five years of deregulation, Texans pay among the highest rates in the country outside the Northeast. Rates here average — more than 12 cents per kilowatt hour — one-fifth higher than the national average — according to Energy Department figures for November.
Explanations range from consumers' failure to shop around, to an absence of strong out-of-state competitors.
The buyout firms also reached a side agreement with two environmental groups to drop plans for eight of TXU's 11 proposed new coal-burning power plants and support mandatory limits on emissions of greenhouse gases that are linked to global warming.
Environmental groups responded with glee that eight of the coal plants appeared dead, but they were disappointed that the would-be owners still plan to seek approval for three new plants that opponents say are the dirtiest of the lot.
The Sierra Club said it didn't understand why the company would go ahead with three plants in the face of strong opposition. Tom Smith, Texas director of Public Citizen, said his group would seek a two-year moratorium on all plants that burn pulverized coal.
But Fred Goltz, a partner with KKR, said the three coal plants were crucial to meet future demand for energy in Texas — and for the economics of the purchase.
"Those three plants resolve capacity issues for the near- to medium-term," Goltz said. Eventually, he said, managing demand and improving technology for burning coal cleanly will help fill the state's energy needs.
Texas avoided the widespread outages that hit California earlier in this the decade, partly because companies had built many gas-fired plants.
This month, managers of the state's electric grid said that if no new power plants are built, the state's cushion during peak summer use would last until 2009, a year later than previously estimated.
Critics said TXU was trying to rush the coal plants into operation before Congress enacts stricter limits on emissions. Analysts said TXU's buyers may have calculated that Texas can wait for new power.
"The fact the new buyer says 'We're not going to build them' makes you wonder if they were needed, and what we'll do when more capacity is needed," said David Pursell, an analyst with Pickering Energy Partners Inc. in Houston. "Ultimately you come back to coal or nuclear."
Reports of TXU's sale leaked out Friday, and were followed by long negotiations that concluded Sunday night.
In an interview, TXU Chief Executive C. John Wilder said he had never shopped the company since arriving in early 2004.
"This came completely out of right field," he said. But he added that power companies make logical targets for private-equity buyers who have been on a shopping spree the last couple years.
"This is the perfect match for them," Wilder said. "It's risky, it's long-term, it's complex, it requires a lot of capital and a lot of creativity. That's the style of investing they like to do."
Wilder's future was unclear. He said he has not signed a contract to stay with the company.
But the CEO's contract could let him walk away with more than $140 million in cash severance, early vesting of performance units and restricted stock awards, and distribution of trust shares, according to Paul Hodgson, a senior research associate at The Corporate Library, which tracks governance and compensation.
If federal regulators and TXU shareholders approve the sale, it would be the largest private buyout ever, surpassing Kohlberg Kravis's $25.1 billion takeover of RJR Nabisco in 1988.
Federal regulators may have limited ability to examine the deal because utilities that belong to the agency that runs most of the Texas power grid are not subject to federal oversight — unlike power companies in the rest of the country.
A spokesman for the Federal Energy Regulatory Commission said by e-mail that federal regulators haven't determined whether they will review the deal.
Nuclear regulators are expected to review the sale, said a TXU spokeswoman. TXU said no approval was needed from state regulators.
TXU serves 2.3 million customers, mostly in the Dallas-Fort Worth area, and competes against other power producers in the deregulated Texas electric market as far afield as Houston.
TXU lost about 5.5 percent of its retail customers in the 12 months ended last Sept. 30. Still, the company has prospered because electric rates in Texas are tied to the price of natural gas while TXU generates much of its power more cheaply at coal and nuclear plants.
That's led state lawmakers to grill company officials over their rates — especially at a time when analysts are forecasting TXU earned about $2.5 billion in 2006. TXU is scheduled to release its full-year results on Tuesday.
While investors, customers and environmentalists found something to like in the deal, one group that could be disappointed are bondholders.
Fitch Ratings downgraded TXU's credit, and Moody's Investors Service and Standard & Poor's warned they could do the same. The agencies warned that TXU was likely to take on much more debt to finance the sale and has been losing customers.