USA: Mirant, Dynegy May Be Buyout Prey After KKR-TXU

Mirant Corp. and Dynegy Inc. are among power producers that may lure private equity firms after Kohlberg Kravis Roberts & Co. agreed to acquire TXU Corp. in the biggest- ever leveraged buyout, Stephan Truffer of EIC Partners AG said.

Mirant and Reliant Energy Inc. have attractive valuations given the assumed TXU takeover price, Deutsche Bank AG analysts including John Kiani in Houston, wrote today in a note. Constellation Energy Group and Entergy Corp. have the ``highest re-gearing potential,'' or the greatest ability to absorb debt, UBS analyst Vincent Gilles said in an investor note.

Buyout firms may raise a record $230 billion this year, up 8.5 percent from 2006, as investors seek returns that surpass stocks and bonds, according to London-based Private Equity Intelligence Ltd. KKR and Texas Pacific Group will acquire TXU, the largest power producer in Texas, for $45 billion, the companies said today.

``Mirant and Dynegy are the sort of players that could be attractive,'' said Truffer, who helps manage the $158 million Energy Utility Fund at EIC Partners in Feldmeilen, Switzerland. The holdings include shares of Mirant, NRG Energy Inc., Exelon Corp. and International Power Plc. ``Private equity groups with money to place are looking.''

KKR, run by Henry Kravis and George Roberts, and David Bonderman's Texas Pacific will pay $69.25 for each TXU share, or 15 percent more than the Dallas-based power producer's closing price on Feb. 23, the companies said. About $12 billion in debt will be assumed, TXU spokeswoman Lisa Singleton said.

Cash, Debt
The deal topped Blackstone Group's takeover of Equity Office Properties Trust, the biggest U.S. owner of office buildings, for $39 billion.

The acquisition ``should cause a re-valuation by the market of many independent power producers,'' Deutsche Bank analysts including Kiani, wrote in a note. 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.

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 of six analyst estimates compiled by Bloomberg. Natural-gas prices that more than tripled this decade have raised Texas power prices, making TXU's coal and nuclear plants more valuable.

Capacity Shortages
Chief Executive Officer C. John Wilder 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. The shares today surged 13 percent to $67.82 in New York. Mirant, an Atlanta-based U.S. electricity producer that emerged from bankruptcy last year, has a market value of $9.8 billion. It has $3.8 billion of bonds outstanding and its debt has a B+ classification from Standard & Poor's, or four levels below investment grade.

Felicia Browder, a Mirant spokeswoman, wasn't immediately available to comment. The stock jumped as much as 5.4 percent. Shares of Entergy, Louisiana's largest utility owner, gained as much as 4.2 percent to $105.20. Yolanda Pollard, a spokeswoman for the New Orleans-based company, declined to comment. Power producers that sell electricity on the wholesale market, such as Mirant and Dynegy, are attractive because they may benefit from power capacity shortages in geographical areas such as California and the Northeast U.S., Truffer said.

``Shortages are arising on the capacity side,'' he said. Record Investment 

Shares of International Power, a U.K. electricity producer with operations in Texas, rose 1.4 percent. TXU, as part of the buyout accord, will cancel eight of 11 coal-fired plants it planned to build, reducing the so-called reserve margin, or the surplus generation capacity, in the state.

``It's good that private equity groups make these bids because it helps valuations in the U.S. market,'' Truffer said. ``International Power has been a potential target for some time.''

Aarti Singhal, a spokeswoman for International Power in London, declined to comment. NRG's shares gained 7.1 percent. The Princeton, New Jersey- based company is the second biggest power producer in Texas, after TXU. Dave Knox, an NRG spokesman, declined to comment.

Abandoned Mergers
Dynegy, owner of power plants in 10 U.S. states, has a market value of $4.3 billion and outstanding bonds of $3.8 billion. It has a B rating at S&P, five levels below investment grade. The stock gained 3.7 percent.

David Byford, a spokesman for Houston-based Dynegy, declined to comment. Buyout firms have announced almost $50 billion in takeovers this year, excluding today's deal, after a record $700 billion in 2006, according to data compiled by Bloomberg. Investors handed over $432 billion into private-equity funds last year, a new high, according to Private Equity Intelligence.

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.

U.S. regulators haven't always given proposed utility mergers a green light.
FPL Group Inc. abandoned a planned takeover of Constellation in October. Mary Lou Kromer, a spokeswoman for FPL in Juno Beach, Florida, today said ``we don't comment on rumors or speculation.'' Constellation spokesman Larry McDonnell in Baltimore also declined to comment. Reliant, a Houston-based power retailer that has posted losses in 12 of the past 16 quarters, has a market value of $5.3 billion and $2.7 billion in outstanding bonds. It has a B classification at S&P. Patricia Hammond, a spokeswoman for Reliant, couldn't immediately be reached.

Autor: By Lars Paulsson (Bloomberg) 

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