TXU Buyout

Haven't seen it in any of the press releases, but CS and Lehman seem to have advised TXU in the past, so I'd guess they are involved..

Look at the IBO newswire on the left side of this page

I meant which i-banks were advising TXU. I know that KKR is leading the buyout.

Morgan and JPM - read the company press release if you really are that curious.

I can't seem to find the press release. TXU, KKR, and TPG have not put out any releases on their websites. I also can't find it through google or any of the major financial websites. Maybe I'm just dull =/

i'm having the same problem as bankerbot

I'm a moron and read the thing wrong before posting.

TXU wouldnt have been posted yet I don't beleive.

I wonder how the tree-huggers are going to react to this deal.

They've already been giving them hell for their plan to build more coal fired plants.

coogikat, where did you find this information?

can you post the names? I am not a subscriber

Check a few posts up.

TXU was advised by Credit Suisse and Lazard, with attorneys Cravath Swaine & Moore and Sullivan & Cromwell. The buyers were advised by Citigroup, Goldman Sachs, J.P. Morgan Chase, Lehman Brothers, Morgan Stanley and attorneys Simpson Thacher & Bartlett and Vinson & Elkins.

Citigroup, J.P. Morgan Chase, Lehman and Morgan Stanley are also smaller investors in the deal.

Pretty much all the BBs

So which of the Sponsors/LevFin groups on the buyside in this deal are actually there in an advisory role? Are GS, Leh and MS also on the deal purely for financing?

Coog - would you mind pasting the entire text of the article in? Can't get it through my school's library proxy yet... I appreciate it.

For years, cash-rich buyout firms have tried to break into the electricity business only to be rebuffed by wary regulators, consumer groups and environmentalists. Now, in what would be the biggest leveraged-buyout ever, an investor group is hoping it has cracked the code.

A total of six firms -- led by Kohlberg, Kravis, Roberts & Co., Texas Pacific Group and Goldman Sachs Group -- have signed a deal to buy utility powerhouse TXU Corp. for $32 billion plus more than $12 billion in TXU debt, according to people familiar with the matter. TXU directors last night voted to recommend that shareholders approve the deal.

In a creative twist, the firms have moved quickly to pre-empt opposition from powerful environmental groups while seeking support from various regulators and politicians. Already, the potential buyers have promised to cancel plans to build all but three of the company's proposed 11 coal-fired plants. And they are planning to placate consumers with rate reductions.

The deal marks a quantum leap in the political sophistication of the buyout world, and may signal a broader remaking of private equity's image in the utility industry. Buyout firms have generally received a chilly reception from utility regulators because they're seen as temporary, profit-driven caretakers not answerable to public shareholders or sensitive to consumers. If the prospective TXU buyers can overcome that perception, they could potentially open the door for more private-equity investors.

A successful deal will also create a chance to profit from a central predicament facing today's utility industry: a public that hungers for more and more electricity to burn, but has limited will to build new plants for providing it.

But it's far from a sure thing. Regulators at all levels of government could trip up the deal. It may also be subject to complaints from consumers who regard reasonably priced electrical service as a basic right.

The plant cancellations, if they happen, could have an interesting effect. Proposals by other builders, which went dormant after TXU made its big splash, could be revived. A hydralike effect could be the result with environmentalists trying to chop down coal proposals -- there are 11 in the wings -- with many more foes.

If more plants aren't built, an equally troubling scenario may unfold: Power prices could spiral out of control in Texas because there aren't enough suppliers to meet the need and the state is so poorly connected to other states, by high voltage wires, that there's no ability to import power.

• The News: KKR and Texas Pacific are taking steps to pre-empt opposition to their proposed takeover of TXU.

• Behind the Deal: Regulators, environmentalists and consumers frequently have stymied buyouts of utilities.

• What's Next: Battles over whether TXU's remaining coal-fired plants can be built.

It's possible that the Texas scarcity could hit consumers at about the time that the state lifts price caps for wholesale power sales. Currently, prices are capped at $1,000 a megawatt hour but that will rise to $3,000 by the end of the decade. That could result in a windfall for generators like TXU -- or its owners -- with its large fleet of plants if scarcity forces more marginal generators into the market, where they would have the effect of lifting overall prices.

Twice before, two of the private-equity investors involved in the deal -- KKR and Texas Pacific -- have tried to buy utilities and come up short after running into a buzz saw of criticism from state officials and consumers.

The firms are attempting to get out in front of TXU's many detractors and make concessions early, so that dislike of TXU's operating practices does not taint the deal.

On Saturday, two big environmental organizations that had fought TXU's plans to build the new coal-fired operations in Texas agreed to support the deal on the assurance that the buyers would agree to withdraw permit applications, killing the projects.

There is an element of stagecraft at work, too. TXU already had plans to cut six of those plants, said people familiar with the effort. The plants that remain on the drawing board are responsible for the lion's share of the profits of the entire 11-plant project, said another person close to the company.

Private-equity firms once shunned utilities as capital-intensive, regulated and low-return businesses. But now, in a world of cheap debt, their steady and predictable cash flows have made them desirable targets, at least in deregulated states.

One reason the buyers have zeroed in on TXU: It possesses unrivaled power in a state that has removed nearly all price controls for the sale of electricity. It owns the largest fleet of power plants, 19 in total, and serves the most customers.

Under the tenure of Chief Executive C. John Wilder, TXU became one of the nation's most controversial utility companies, known for turning off the service of late-paying customers, boosting rates rapidly and plans to build plants that produce huge amounts of harmful gases. It also became one of the most profitable utilities in U.S. history.

In 2003, Texas Pacific announced its intention to buy Enron Corp.'s Oregon utility, Portland General Electric. The deal attracted widespread opposition because Texas Pacific was seen as a short-term investor that wouldn't have customers' interests in mind. Texas Pacific told investors in 2005 that its returns, before taxes, have averaged 55% a year. The Oregon utilities commission eventually rejected the Portland General deal on the recommendation of its staff.

Also in 2003, KKR announced an agreement to buy UniSource Energy Corp., an Arizona utility, for $2.85 billion in cash and debt. That effort ended in late 2004 when the Arizona commission, on a 4-to-1 vote, rejected KKR's bid. In both cases, rate concessions didn't look substantial enough to overcome fear of the risks to customers if service deteriorated amid cost-cutting.

This time around, it was clear that the buyers needed a more strategic approach. At the heart of the potential new owners' campaign for support lies Texas Pacific representative William Reilly, a former administrator of the Environmental Protection Agency under President George H.W. Bush. Mr. Reilly became the public face for the buyout group largely because of his reputation among environmentalists. David Bonderman, co-founder of Texas Pacific, has a similar reputation. He is touting his board membership of World Wildlife Fund as evidence that the group will behave responsibly.

The two men have a solid history together. Back in the late 1970s, Mr. Reilly tapped Mr. Bonderman -- then a Washington, D.C., lawyer -- to write a supporting brief for environmentalists before the Supreme Court. Later, when Mr. Reilly served as chairman of the board of World Wildlife Fund, he asked Mr. Bonderman to join the group's board. Mr. Bonderman, in turn brought Mr. Reilly to Texas Pacific.

Still, Mr. Reilly was stunned five or six weeks ago when Mr. Bonderman walked into his office at Texas Pacific and asked for his help in connection with the planned buyout of TXU, according to people familiar with the matter. Initial conversations with environmentalists quickly made the two realize that the campaign would not be easy.

The efforts to woo conservation groups quickly focused on the Environmental Defense Fund, along with Public Citizen, and the Natural Resources Defense Council. On Wednesday, Jim Marston, an attorney with the Environmental Defense Fund, went to San Francisco to listen to Texas Pacific's case in a meeting that went from 8 a.m. to 1 a.m. the following day.

Many of the proposals that Texas Pacific and KKR came up with were developed in connection with Green Strategies, a consulting firm based in Washington state headed by Roger Ballentine, a former Clinton White House staffer.

Under Mr. Reilly, the potential owners are also planning a sustainable energy advisory committee that would include Mr. Marston and a representative from the Natural Resources Defense Council as well as a host of prominent Texans. About six days ago, Michael MacDougall of Texas Pacific, along with Fred Goltz and Marc Lipschultz from KKR reached out to James Baker, the veteran Texas politician and former cabinet member, to serve in an advisory capacity at TXU. One of the first things he asked was about environmentalists' position on the deal, according to people familiar with the matter.

On Thursday, the investors took their campaign to Texas Gov. Rick Perry. Mr. Bonderman and Henry Kravis of KKR led the delegation, which included Mr. MacDougall and Mr. Goltz, in a 90-minute meeting at the governor's mansion. "The governor gave them the message that Texas is in dire need of new capacity," said Robert Black, Mr. Perry's press secretary. Mr. Black noted that the three plants still on the TXU drawing board, in addition to plants proposed by others, should solve the state's "immediate challenge."

Support of the governor and the legislature is critical both to approval and to the financial viability of the deal. There are several bills before the Texas legislature now which if enacted could have a negative impact on the potential profitability of the buyout.

MORE

• Page One: Texas Pacific, KKR Prepare TXU Bid

• Who's Who in Private Equity

• Biggest Buyouts

The buyers will need all the goodwill they can get. Consumer resentment of TXU runs high in Texas, where under deregulation the company has aggressively moved to raise power prices that are now among the highest in the nation. In a bid to win over consumers, the private-equity buyers have put out the word to Texas lawmakers that they plan a 10% rate reduction. Already, some lawmakers who have been briefed are unimpressed. Texas state Rep. Sylvester Turner of Houston says he believes rates should drop at least 30%.

Mr. Turner said Sunday the sale "is causing me to re-evaluate the market we created in 1999. I have serious questions about the direction we're headed and the impact on consumers who never wanted deregulation to begin with."

Under terms of the deal being contemplated, Mr. Wilder and other top executives would remain at the company, while rolling over their 5% ownership stakes into the new ownership plan. They would then have access to options that could give them another 5% stake over time. Private-equity firms generally need the support of management when making a bid for a public company. By giving management equity, that support is usually forthcoming. Mr. Wilder appears to be entitled to change of control payments that could be worth $65 million or more.

Insiders have described Mr. Wilder as brilliant but "tone deaf" to the niceties of the utility business. Erle Nye, the longtime chief executive whom Mr. Wilder replaced, typified the courtly utility chief; Mr. Wilder seemed brusque by comparison.

TXU did not return calls seeking comment.

Dallas Mayor Laura Miller said TXU has communicated poorly with elected officials. She's never met Mr. Wilder and said he has refused to meet with critics to discuss a long list of grievances that range from the coal plants, which she opposes, to nagging problems like perpetually burned-out street lights in downtown Dallas, undermining a $190 million redevelopment effort.

"Large swaths of downtown have been dark and scary," she said. "How's customer service going to get better with a bunch of outsiders running the company from New York or San Francisco?"

The buyers have tried to show that the company's tone will change. Tom "Smitty" Smith, director of Public Citizen, an advocacy organization, said he met with a KKR representative on Friday who said, "You've been a frequent critic of TXU, let's open a dialogue."

Mr. Smith said he found the overture "refreshing," particularly since he'd been trying to get a meeting, he says, with Mr. Wilder for more than a year to express concerns.

Whether the new owners could come to terms with the management of TXU was also a big question. But at a long meeting 10 days ago, Messrs. MacDougall and Goltz met with Mr. Wilder to review the specific commitments the two planned to make to reduce hostility to their bid.

Among the several U-turns: TXU was planning to introduce coal-fired plants into Virginia, Maryland and Pennsylvania. Indeed, David Hawkins of the NRDC already had 16 lawyers trying to derail the proposed move. The new owners promised environmentalists that there would be no such expansion if their bid went through, these people say.

Once environmentalists get over the euphoria of getting eight coal-fired plants off the table, however, some may wonder whether they got enough out of the bargain. After all, they've garnered an agreement that the buyers won't build plants they never had permission to build.

In a legal victory last week, challengers -- including a coalition of Texas cities led by the Dallas and Houston mayors and the Chickasaw Indian nation in Oklahoma -- were given four months to prepare cases to challenge the TXU plan.

TXU was advised by Credit Suisse and Lazard, with attorneys Cravath Swaine & Moore and Sullivan & Cromwell. The buyers were advised by Citigroup, Goldman Sachs, J.P. Morgan Chase, Lehman Brothers, Morgan Stanley and attorneys Simpson Thacher & Bartlett and Vinson & Elkins.

Citigroup, Lehman and Morgan Stanley are also smaller investors in the deal.

Anyone else notice the unusual stock/options volume TXU was experiencing a day or so before the announcement? Unless the market is incredibly efficient and psychic, it looks like someone traded on inside information. With so many firms/people involved in this deal, I'm not surprised this thing got leaked.

how do you think they got the regulators and environmentalists to sign on to the deal before it even happened? by blowing flowers up their ass?