Kohlberg Kravis Roberts & Co. and Texas Pacific Group agreed to acquire TXU Corp., the largest power producer in Texas, for $44 billion in the biggest-ever leveraged buyout, said two people with knowledge of the deal.
KKR, run by Henry Kravis and George Roberts, and Texas Pacific will pay between $69 and $70 a share, or almost $10 more than TXU's closing price at the end of last week. They will also assume about $12 billion in debt, said the people, who asked not to be identified because the deal hasn't been announced.
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, 41, 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.''
TXU, 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 estimate of six analysts surveyed by Bloomberg. Natural-gas prices that more than tripled in this decade have increased power prices in Texas, making TXU's coal and nuclear plants more valuable.
`Good Cash Machine'
The plants can produce more than 18,300 megawatts, and the company is also the largest electricity retailer in the state, selling power to more than 2.2 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.
Lisa Singleton, a spokeswoman for Dallas-based TXU, couldn't be reached for comment. Mark Semer, a KKR spokesman, and Owen Blicksilver, a representative for Texas Pacific, declined to comment.
Lehman, Morgan Stanley
KKR and Texas Pacific will spend $5 billion on the deal, and four investment banks, including Lehman Brothers Holdings Inc. and Morgan Stanley, will put up another $3.5 billion, the people said. The rest of the purchase price will be borrowed.
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.
Spokeswomen Torie von Alt at Lehman and Marie Ali at Morgan Stanley declined to comment. Both banks are based in New York.
TXU Chief Executive Officer C. John Wilder will have a small slice of the equity investment and will continue to run the company, the people said. Wilder, 48, has overseen an almost fivefold gain in TXU shares since taking over in February 2004. Wilder has returned TXU to a focus on electric generation and distribution in the Dallas region.
TXU will have 50 days to consider any other offers for the company, the people said.
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.
Opposition to Plants
The Natural Resources Defense Council and Environmental Defense negotiated in the past two weeks with the buyout firms and Goldman Sachs Group Inc., which is advising on and financing the transaction. The company 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.
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.
Deals Get Bigger
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.
Past Investments
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 David 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.
TXU shares gained $2.38, or 4.1 percent, to $60.02 in New York Stock Exchange composite trading on Feb. 23, the biggest one-day gain in more than nine months. The merger was first reported after exchanges closed, and the shares jumped another $10 in after-hours trading.
The cost of credit-default swaps tied to $10 million in bonds of TXU, rose $254 to $87,475 on Feb. 23, according to Bloomberg data. An increase in the contracts, used to speculate on a company's ability to repay its debt, suggests a deterioration in the perception of credit quality.
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