Private-equity giants to buy TXU in $45 billion deal

Dallas-based TXU Corp. would pass into private hands if its many-sided, historically large agreement with private-equity giants wins approval and does not run into deal-breaking moves by Texas policymakers.

The transaction involves Kohlberg Kravis Roberts and Texas Pacific Group, with Goldman Sachs in a major supporting role, acquiring TXU in a deal valued at $45 billion. It would be the biggest private-equity buyout in history. And perhaps proving the serious business that climate change politics has become, it would mark the first time that a deal involved major concessions to national environmental groups.

GS Capital Partners, Lehman Brothers, Citigroup and Morgan Stanley intend to be equity investors at closing, TXU said, noting that the agreement calls for TXU shareholders to be offered $69.25/share in cash, a 25% premium over TXU's average share price over the 20 days ending Thursday, February 22. In addition to more than $32 billion in cash payments for TXU's outstanding shares, the new owners would assume more than $12 billion in TXU debt.

Under the buyout agreement, TXU may solicit proposals from third parties through April 16. The company said its board of directors intends to solicit proposals during this period but will not disclose developments in the solicitation unless its board of directors makes a decision on an alternative proposal.

The record-breaking deal came to light over the weekend, and -- if, as the prospective buyers hope, it proceeds to closing in the second half of this year -- it would result in the cancellation of TXU's plans to build eight 858-MW pulverized coal plants in Texas (see map). It also would result in a 10% reduction in TXU's retail rates in Texas, and a commitment by the new owners to invest a total $400 million on demand-side management programs over the next five years.

The company said it would still build a total of 2,200 MW of lignite-fired capacity at its Oak Grove and Sandow stations in Texas, and it is prepared to "un-mothball" up to 1,600 MW of idled natural gas-fired capacity in Texas if that power is needed to maintain system reliability.

Describing the agreements made with Environmental Defense and the Natural Resources Defense Council, KKR and Texas Pacific also said that under their ownership TXU would reduce its carbon-dioxide emissions to their 1990 level by 2020; support a federal mandatory cap-and-trade program to regulate carbon dioxide emissions; and join the FutureGen Alliance, the consortium of companies supporting FutureGen, the Department of Energy's effort to create the world's first near-zero-emissions solid-fuel-fired plant.

"This is a momentous event for our company in our long journey to transform TXU from a former integrated monopoly to high-performance businesses," said TXU Chairman and CEO John Wilder, who is credited with turning TXU's fortunes since he joined it three years ago this month after a stint as Entergy's CFO.

"With these long-term and very informed investors, we can execute a new strategy that will allow us to reshape TXU's program to build new electric generation units," Wilder continued. "Our new strategy will meet two important objectives: addressing Texas's immediate and future energy and reliability needs; and doing so in a manner that responds to the desires of policy makers and other key stakeholders to incorporate new technology advancements and conservation."

TXU has drawn bigger and bigger brickbats from national environmental groups and political figures as well as environmentalists and big-city mayors in Texas over its coal-plant plan, which was set back last week by a Texas judge's injunction against Republican Governor Rick Perry's 2005 executive order to "fast-track" the regulatory review of solid fuel-fired environmental permits and by Texas administrative law judges' decision to delay the evidentiary hearing for six TXU coal-plant permit applications by more than four months.

Henry Kravis, founding partner of KKR, said that his firm and the other investors, working with TXU's Wilder, "have developed a new vision ... of how we can turn TXU into a more innovative, customer-centric, environmentally friendly company, and we plan to work with management to implement it."

Created: February 26, 2007

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