Txu Lbo

Topics: Leveraged buyout, Kohlberg Kravis Roberts, Private equity Pages: 8 (2977 words) Published: December 3, 2012
Investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group will buy TXU Corp., the largest power producer in Texas, for $45 billion in the biggest- ever leveraged buyout.The investors are providing $8.5 billion in cash and the rest of the deal will be debt, according to people familiar with the matter. The buyout firms will put up $5 billion and Goldman Sachs is investing $1.5 billion, Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley are also investing. KKR, run by Henry Kravis and George Roberts, and David Bonderman’s Texas Pacific, joined by Goldman Sachs Group Inc., will pay $69.25 for each TXU share, 15 percent more than the closing stock price on Feb. 23. TXU has only $11 billion of debt with the new $36 Billion debt, $22.5 billion of which matures by 2014 the rest $13.5 to mature in 2034. TXU energy post LBO has been renamed as Energy Future Holdings Inc., with the acquisition using a combination of high-yield, high-risk loans and bonds. As part of the buyout, the electric distribution part of the company will be called Oncor Electric Delivery, the electric generation business called Luminant, leaving TXU Energy as solely a retail provider of electricity without any electrical distribution or production assets. Off the various investors, the largest one KKR invests primarily through leveraged buyouts as well as growth capital investments. It specializes in private equity investments with a focus on specific industry sectors where the firm has created nine dedicated investment groups. TPG is investing $ 1.5 billion followed by Goldman Sachs and others. The likes of Franklin Advisers of San Mateo, California, Berkshire Hathaway Life Insurance Co., a unit of Warren Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., and Capital Research & Management Co. are among the largest bondholders TXU was highlighted in Peridot Capital's 2006 Select List as an undervalued gem in the midst of a very shareholder-friendly turnaround. The same leverage that could prove so lucrative for KKR with its earlier LBO of hospital operator HCA Holdings Inc. Power generators are drawing renewed takeover interest as electricity demand in many parts of the country is expected to outstrip generation capacity in the coming years, pushing power prices higher. With $13.50 per BTU, the earnings are strong enough to cover the secured loans. A min $7 to $8 per BTU would be sufficient to sustain the payments and all the covenants. TXU has been battling environmentalists and others who have been trying to prevent the company from more than doubling its fleet of coal-fired power plants in Texas and the deal is also notable for a drastic change in environmental policy for the energy giant, in terms of its carbon emissions from coal power plants and funding alternative energy. In 2002, the state of Texas deregulated the Texas electric market, and TXU lost its monopoly on retail electric sales in northern Texas; TXU now competes statewide against other energy companies. In Oct 2007, shares of TXU surged $7.91, or 13 percent, to $67.93 today in New York Stock Exchange composite trading after announcement of the LBO. That's a more than fivefold increase since Chief Executive Officer C. John Wilder took over in February, 2004. TXU management, including Chairman and Chief Executive John Wilder, have made no commitments to stay with the company should the planned takeover go through. Since Wilder became CEO of TXU in 2004, he helped the utility cut costs, reduce debt, and sell assets in Texas and Australia. Under his tenure, TXU's stock has risen from $27. Refer Appendix A for the Financial Statement review of the company before and after the LBO. The main items standing apart are as follows: i. The increased leverage owing to the LBO has been attributed on the asset side in terms of a big increase in goodwill between 2006 and 2007 which is primarily driven by the excess in the purchase price over the fair price of...
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