TXU buyers confident of turnaround
DALLAS — 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.