The board of Dallas-based TXU is set to vote on the proposal this weekend, said a person familiar with the deal who declined to be named because the talks were private. Texas Pacific Group may be part of the acquisition, according to the Wall Street Journal, citing unidentified people. The possible TXU sale was previously reported by CNBC.
The purchase price is not yet final, the person said. Shares of TXU surged as high as $70 in after-hours trading, valuing the company at about $32 billion. With TXU's $16 billion in debt, the transaction may be worth more than $48 billion. Blackstone Group LP's purchase this month of Equity Office Properties Trust for $39 billion, including debt, was the largest previous buyout.
``An acquisition by KKR will be a blow to TXU's credit quality because leverage would increase substantially,'' said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``Leveraged buyouts of utilities have been relatively rare.''
TXU shares have jumped sixfold since 2002, when failed expansions overseas helped push the company near bankruptcy. Chief Executive Officer C. John Wilder, 48, returned the company to a focus on electric generation and distribution in the Dallas region since taking over in February 2004. The company's credit is rated Ba1 by Moody's, one level below investment grade.
TXU spokeswoman Lisa Singleton didn't respond to requests for comment. Molly Morse, a KKR spokeswoman, and Owen Blicksilver, a representative for Texas Pacific, declined to comment.
State Approval
Any sale of TXU, the largest power producer in Texas with more than 18,300 megawatts, would need the approval of the Texas Public Utility Commission. The company is also the largest electricity retailer in the state, selling power to more than 2.2 million homes and businesses.
``It's important to remember that we have had two private equity buyers turned down by state utility commissions,'' said Tom Burnett, director of research at Wall Street Access in New York, who tracks acquisitions. ``A lot of these state agencies frown on the extra leverage placed on these assets by the private-equity groups.''
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 New York-based Kohlberg Kravis, J.P. Morgan Partners LLC and Wachovia Capital Partners.
Oregon in March 2005 rejected a purchase of Portland General Electric by Fort Worth, Texas-based Texas Pacific.
``Regulators frown upon leveraged buyouts because it increases the riskiness of the utility and their ability to service their customers,'' Egan said.
Credit Risk
Credit-default swaps based on $10 million of TXU's bonds rose $770 to $84,380 as of 4:30 p.m. today in New York, according to London-based CMA Datavision. It was the first increase since Feb. 14. A rise in the cost of the contracts, used to speculate on a company's ability to repay debt, signals deterioration in the perception of credit quality.
Closely held buyout firms such as KKR 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 other funds or investors in initial public offerings.
Buyout Boom
The largest LBO before Equity Office was the $33 billion purchase in November of hospital chain HCA Inc. by Bain Capital LLC, Kohlberg Kravis, Merrill Lynch & Co. and HCA co-founder Thomas F. Frist Jr. That topped the $31.3 billion that Kohlberg Kravis paid in 1989 for RJR Nabisco Inc.
Private-equity firms announced a record of more than $700 billion in takeovers last year and almost $50 billion so far this year, Bloomberg data show. Investors, seeking returns that exceed stocks and bonds, poured $432 billion into buyout funds last year, also a record, according to London-based Private Equity Intelligence Ltd.
KKR has raised $16.1 billion for a new U.S. buyout fund and expects to reach its cap of $16.6 billion, a person familiar with the matter said Jan. 11.
``They're taking a very big political bet,'' said David Dreman, who helps manage $22 billion at Dreman Value Management including TXU shares. ``If things go well for TXU they're going to put on seven to nine coal-fired plants. KKR must have a degree of certainty they can get it done. There could be major upside.''
Coal Plant Controversy
TXU has stirred controversy in Texas in the past year with its plan to build as many as 11 coal-fired generators at a cost of $10 billion. Environmentalists, the mayors of Houston and Dallas and some state lawmakers have said the plants will make the state's air pollution problems unmanageable.
The company's biggest rival in the race to build new generation in Texas is NRG Energy Inc., which bought a Texas power company called Texas Genco from a group of buyout firms including Texas Pacific and Kohlberg Kravis in 2005 for $5.8 billion.
CNBC reported the possible acquisition after exchanges closed. TXU shares had gained $2.38, or 4.1 percent, to $60.02 in New York Stock Exchange composite trading, the biggest one- day gain in more than nine months. They jumped another $10 in extended trading.
Deregulation
Texas deregulated its power industry in 2002. Wholesale electric generation in the state also is competitive, along with retail sales of power. The transmission and distribution or ``wires'' business remains regulated. TXU has all three operations.
General Electric Co. and a unit of Australia's Macquarie Bank Ltd. competed a year ago to buy a stake in TXU's wires business for $5 billion or more, the Wall Street Journal reported in February 2006, citing people familiar with the situation.
A private equity transaction involving TXU might work because the company is in Texas, said Barry Abramson, who helps manage about $28 billion in assets, including TXU shares, at Gamco Investors in Rye, New York.
``Maybe the right assets going to the private equity group could be acceptable,'' Abramson said, adding that the regulated portion might eventually end up with another company.
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