TXU Smoothes Path for Biggest-Ever Buyout

Texan energy producer TXU will cancel eight of 11 planned coal facilities to gain support from environmentalists for its $44 billion buyout by a consortium led by Kohlberg Kravis Roberts and Texas Pacific. TXU shares soared 17% to $70.30 in AH trading on news of the bid. The consortium will pay about $70 a share, valuing the company at $32 billion, and assume $12.38 billion of TXU debt. The consortium pre-empted environmentalist opposition, which has scuppered such deals in the past, by approaching the groups in advance. In addition to cancelling the Texan plants, TXU will scrap planned facilities in Virginia, Maryland and Pennsylvania; back a carbon dioxide emissions limit; and invest in energy efficiency programs. The deal could still run aground on government regulations and objections from consumers long hostile to TXU. Also, if the cancelled Texan plants are not built by other firms, there may not be enough supply to meet demand and Texan electricity prices could skyrocket. TXU was an attractive buyout candidate because in Texas, there are almost no price controls on electricity. The deal bumps the recent Blackstone buyout of the Equity Office REIT, which totaled $39 billion including debt, from the position of biggest buyout in history.

Sources: Wall Street Journal (I, II, III), Reuters, Bloomberg, MarketWatch
Commentary: TXU Building 11 Coal Plants Just 'Under the Wire' Of New Regulations? • TXU, NewsCorp, AutoNation Top List of Hedge Fund Pullouts in 2Q'06 • Is Prudence Passé? Private Equity and LBO Cyclical Sector Targets. Conference call transcript: TXU Q3 2006
Stocks/ETFs to watch: TXU Corp. (TXU). Competitors: American Electric Power Co. Inc. (AEP), Centerpoint Energy Inc. (CNP), Reliant Energy Inc. (RRI). ETFs: Utilities HOLDRs (UTH), Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU)

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