KKR, Texas Pacific $44 Billion TXU Bid Includes CEO

KKR, Texas Pacific $44 Billion TXU Bid Includes CEO
By Dan Lonkevich

Feb. 24 (Bloomberg) -- Kohlberg Kravis Roberts & Co. and Texas Pacific Group plan to include TXU Corp. Chief Executive Officer C. John Wilder in their buyout of the largest power producer in Texas for as much as $44 billion, said a person familiar with the proposal.

The TXU board is meeting today to consider the offer to buy the company for $69 to $70 a share, said the person, who asked not be named because the discussions are confidential. The offer, almost $10 above yesterday's $60.02 closing price for TXU stock, would value the equity at about $32 billion. The buyers would also assume about $12 billion in debt, the person said.

The takeover, if completed, would be the largest-ever acquisition by a private-equity firm. KKR founders Henry Kravis and George Roberts held that title until earlier this month when Stephen Schwarzman's Blackstone Group LP bought Equity Office Properties Trust, the largest U.S. owner of office buildings, for $39 billion including debt.

``I have no doubt that the TXU board will approve this merger over the weekend,'' said Mark Williams, a professor of finance and economics at Boston University who studies energy markets. ``But that does not address the looming and real public policy issue.'' The Texas Public Utility Commission may object to the increased debt of a leveraged buyout, Williams said in an e-mail today.

Lisa Singleton, a spokeswoman for Dallas-based TXU, didn't respond to requests for comment. Ruth Pachman, a KKR spokeswoman, and Owen Blicksilver, a representative for Texas Pacific, declined to comment today.

Wilder

Wilder, 48, has overseen an almost fivefold gain in TXU shares since taking over in February 2004. He has returned the company to a focus on electric generation and distribution in the Dallas region. The company was near bankruptcy in 2002 after failed expansions overseas.

Wilder and other TXU managers are participating in the buyout offer, and he will continue to run the company if the transaction is completed, according to the person familiar with the matter. Before TXU, Wilder was chief financial officer at Entergy Corp., the New Orleans based utility owner.

While it's not unusual for executives to join in the buyout of their companies, it has caused some shareholders and regulators to question whether managers use their influence with directors to keep the price down. Some buyout agreements include a so-called go-shop provision that allows directors to consider rival bids if they are made.

Kinder Morgan

In August, an investment group led by Richard Kinder, cofounder of Houston-based Kinder Morgan Inc., sweetened its offer for the pipeline company by 7.5 percent to $15 billion after some shareholders balked at the initial price. His partners were American International Group Inc., Goldman Sachs Group Inc., Carlyle Group and Riverstone Holdings LLC.

The U.S. Justice Department has been investigating whether collaboration among buyout firms limits competition for takeovers. So-called club deals have become more common as private-equity firms pursue larger companies.

Five of the 10 largest acquisitions announced last year were by buyout firms. In four of those deals, there were two or more co-bidders.

TXU is the largest power producer in Texas with more than 18,300 megawatts and the largest electricity retailer in the state, selling power to more than 2.2 million homes and businesses.

Failed Deals

Wilder has stirred controversy in Texas in the past year with his plan to build as many as 11 coal-fired generators for $10 billion. Environmentalists, the mayors of Houston and Dallas and some lawmakers have said the plants will make it hard to get the state in compliance with federal clean air rules.

``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.

``This extremely high regulatory risk of not obtaining state approval is one variable which might not have received proper attention in KKR's financially driven models,'' Williams said in his e-mail.

Buyout Boom

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.

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.''

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 of TXU after exchanges closed yesterday. 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 after-hours trading.