TXU deal sparks rise in Reliant, NRG, Mirant, Calpine; Dow Chemical, AMD better on buzz

By Ronda Fears

Memphis, Feb. 26 - A string of takeovers were announced Monday, including the rumored deal from Friday of a record-setting leverage buyout of TXU Corp. by private equity firms Kohlberg Kravis Roberts and Texas Pacific. Buyout buzz targeting several other big names, including Dow Chemical Co. and Advanced Micro Devices Inc., moved those sharply higher as well.

The $45 billion LBO offer for TXU also propped up several power producers.

Reliant Energy Inc., NRG Energy Inc. and Mirant Corp. were widely tossed around Monday as possible takeover targets in the power sector, in spite of unsuccessful deals among those names in the past. One trader said the independent power producers are coming back to the spotlight because of dwindling supply as demand rises.

To that end, another onlooker said Calpine Corp. is very much on the radar screen of buyout firms as it pares down its operations to concentrate on Texas and California, two high-growth areas, while cleaning up its balance sheet in bankruptcy court. However, this analyst said the Calpine play makes more sense in the unsecured debt rather than as a pure equity play.

Also on the tape was Itron Inc., a Spokane, Wash., maker of utility meters, buying Luxembourg-based Actaris Metering Systems for roughly $1.62 billion, including $578.5 million in debt, and the market liked the deal, which the company said will create the world's largest metering firm.

Elsewhere, Temple-Inland Inc., a conglomerate that offers everything from packaging materials to financial services and real estate investments, announced plans to separate into three stand-alone public companies under pressure to do so from big stockholder billionaire Carl Icahn.

Station Casinos Inc. confirmed it will be acquired by Fertitta Colony Partners for $8.8 billion, or $90 per share, and the stock added to gains seen since the management-led LBO was announced in December. The stock (NYSE: STN) moved up $3.20 on the session, or 3.84%, to $86.50; it is up from about $68 in mid-December just before the buyout surfaced.

Chicago-based insurance broker Hub International Ltd. was lifted by news it has agreed to be acquired by funds advised by Apax Partners and Morgan Stanley for $1.8 billion, or $40 per share - a 16% premium to Friday's market. Hub said the buyout would be financed with debt and said it has commitments from Morgan Stanley and Merrill Lynch. The stock (NYSE: HBG) spiked higher by $5.10, or 14.79%, to close Monday at $39.59.

TXU spread too tight

The big news of the day was TXU, although traders said there was considerable hesitation.

For some risk arbitrage players, however, the call spread in TXU was too tight so they shied away from the situation. The stock remained well under the offer price, too, because of headline risk for the deal, an equity trader said, but there was plenty of action in that stock as well as several other power names.

TXU directors voted Sunday night to recommend that shareholders approve the sale at $69.25 per share - a 15% premium to Friday's close and a 25% premium to the 20-day average ended Feb. 22. The stock had zoomed in after-hours trade Friday on rumors of the deal.

On Monday, TXU shares (NYSE: TXU) traded up to $68.45 but eased back to end the session at $67.93, a gain of$7.91, or 13.18%. Some 54.4 million shares traded, versus the norm of 3.4 million shares.

KKR and Texas Pacific Group are leading a group that also includes Goldman Sachs, Lehman Brothers, Citigroup and Morgan Stanley in the buyout. In addition to the $32 billion paid to stockholders, the group also will assume about $13 billion in debt.

The firms won support for the buyout from some environmentalists, who have criticized TXU, by agreeing to sharply scale back TXU's controversial $10 billion plan to build 11 new coal-fired power plants that would produce tons of new greenhouse gas emissions.

Additionally, they have agreed to cut electricity prices by 10%, which they said would save TXU residential customers more than $300 million a year, and limit prices until September 2008.

TXU deal design shrewd

Despite the perceived headline risk, TXU's buyers have craftily designed the deal to secure support not only from stockholders but environmentalists that have been hounding TXU as well as ratepayers and regulators, onlookers said.

"The offer was very clever," said one TXU trader.

"They said, 'You don't want any more coal plants? OK, we won't do that.' And, they said, "You want lower rates? OK, we will do that.' This deal has a tremendous advantage over other utility mergers."

One of the biggest advantages, she said, is that in addition to federal regulators there is only one state regulatory body to contend with rather than multiple states typical of a utility merger of equals.

For another thing, private-equity firms have often steered clear of utilities, viewing them as highly regulated businesses with relatively low return on investment, but deregulation in the industry throughout the 1990s and into the 21st Century, along with growing demand, has made them increasingly more appealing targets.

TXU was near bankruptcy in 2002, when it lost $4.2 billion and was forced to sell units in Europe and Australia, returning to its core electricity operations in Texas. The company recovered to post 2005 profits of $1.72 billion, and Wall Street pundits expect TXU on Tuesday to report 2006 earnings of $2.5 billion.

In recent months, environmentalists have blasted TXU over its plans to build more coal plants and that was seen as one reason that TXU's stock price had fallen from the four-year rebound. The company also has nuclear plants on line.

Henry Kravis, a founding partner of KKR, pledged to make TXU into "a more innovative, customer-centric, environmentally friendly company."

David Bonderman, a founding partner of Texas Pacific, said the new owners' approach would "better manage the delicate balance between the energy needs of a growing Texas population, responsibility to the environment and the cost concerns of Texas businesses and residents."

In addition to appeasing environmentalists, the investors have reached out to Texas officials, including Gov. Rick Perry, in an effort to smooth regulatory approvals and hostility from state legislators.

Regulatory hurdles are paramount in utility deals, no doubt.

In 2004, a KKR-led group dropped a bid to buy UniSource Energy Corp. after an Arizona commission rejected the deal, even though federal officials had approved it. Oregon regulators rejected Texas Pacific's attempt to buy Portland General Electric in 2005, but a Warren Buffett-controlled company succeeded in buying another Oregon utility, PacifiCorp, last March for $5.1 billion after pledging to upgrade its facilities.

Just last week state regulatory staff in New York put a snag in the National Grid plc acquisition of KeySpan Corp., which also had received a federal nod.

Reliant, NRG, Mirant eyed

TXU abandoning plans to build more plants underscored the rising value of power and producers with big wholesale fleets like Reliant Energy, NRG and Mirant, said analyst Daniele Seitz with Dahlman Rose & Co.

Houston-based Reliant Energy and Princeton, N.J.-based NRG also were widely tossed around Monday as possible takeover targets by bigger shops, in spite of unsuccessful deals among those names in the past. Atlanta-based Mirant withdrew a hostile $7.9 billion bid for NRG Energy in June 2006 after two big Mirant shareholders, Pirate Capital and Omega Advisors, objected. Pirate also is contesting the recently announced acquisition of Aquila Inc. by Great Plains Energy Inc. - both of Kansas City - which were both higher Monday on the TXU news.

"The easiest targets are the independent producers," or utilities with large fleets, Seitz said, adding that it could make more sense for a private equity firm to buy out producers or production fleets and then sell the fleets to utilities.

Adding capacity is a paramount goal in the power sector because of growing demand, she said, noting that the value of nuclear power generation has risen from around $100 per kilowatt five years ago to as much as $800 per kilowatt presently.

Reliant Energy shares (NYSE: RRI) gained $1.03, or 6.33%, to $17.31 with a whopping 13.65 million shares traded versus the norm of 2.43 million shares.

NRG shares (NYSE: NRG) added $4.23, or 6.66%, to $67.75 with heavy volume of 11.9 million shares versus the norm of 1.15 million shares.

Mirant shares (NYSE: MIR) advanced $1.18, or 3.19%, to $38.19 also with heavy trade of 10.5 million shares versus the norm of 2.14 million shares.

Calpine sharks circling

In the distressed stock arena, independent power producer Calpine was sharply higher on renewed buzz that a backer for its bankruptcy plan would soon emerge in light of the TXU deal. As a takeover target, Seitz said Calpine may make the most sense among the names getting speculation. But she said the equity probably is not the best way to play Calpine; rather, she suggested the unsecured debt.

A distressed stock trader said there were some big equity players participating in the sharp rise to Calpine stock Monday, but he also acknowledged that many of the Calpine stockholders are hedge funds holding the bonds as well. A distressed debt trader said Calpine's bonds were up 5 points early Monday but came in from that at the close.

Calpine shares (Pink Sheets: CPNLQ) shot up by 30 cents on Monday, or 23.62%, to $1.57 with some 21.55 million shares traded versus the norm of 7.2 million shares.

"Clearly the market is going to be reacting to the shortage of capacity highlighted in the power sector" by the TXU deal, especially its plan to abandon plans to build 11 coal-fired plants as part of the LBO, Seitz said.

"The value of those [Calpine] fleets is rising and will rise more. A bunch of sharks have been swarming around them."

The company is preparing to launch a new $5 billion debtor-in-possession bank facility on Wednesday, which she said will buy more time to sell asserts and that will mean more money in the end.

Since December, there have been heavily circulated rumors of private equity participation in the company's reorganization plan. Earlier this month, Calpine got court approval to seek rights offering sponsors for its reorganization plan, which is supposed to be presented to the court in June.

"They are buying time. In six months, there will be more money" paid for any of their plants on the auction block as well as their remaining fleet, Seitz said.

"You are better off in the unsecured debt, though. I think it will be difficult for the equity investor."

There is a stockholder committee in the Calpine bankruptcy case, however, and those players are betting on a healthy participation in the suggested rights offering that is purported to be the backbone of the company's reorganization plan.

"If they get $700 to $800 per kilowatt, you are in the money," Seitz said. "Right now they are getting $500 to $550 per kilowatt, on the $4 to $5 billion of assets they have sold. But you have a very good chance of making out good on this one."

Dow price tag seen dubious

A report over the weekend in the British publication Sunday Express said Dow Chemical could be on the verge of getting an LBO record that would be another record-setting price tag at $54 billion. But the market was somewhat skeptical, at least of the price tag mentioned in the report, one market source said.

Dow Chemical shares (NYSE: DOW) gained $1.54 on the day, or 3.54%, to a new 52-week high of $44.99. One of its biggest competitors, BASF AG, also marked a 1.3% advance.

The British tabloid was reporting that the Dow offer would come at $60 a share - a 38% premium to Friday's market - in the next few weeks from a consortium of private equity groups including KKR, The Blackstone Group and Carlyle Group, which would then break up the diversified chemical giant Dow.

One market source said the 38% premium seemed a bit much. He pointed to Blackstone's buyout of chemical concern Celanese AG in 2004, which it took public in the United States as Celanese Corp. at a 13% premium over the prior three-month stock price before the LBO was made public.

"Obviously, today's market is richer, but I am a bit leery of a 38% premium," he said.

Temple-Inland facts short

Break-up news pushed Temple-Inland sharply higher, but traders said the market was holding back somewhat due to lacking details on the plan.

Under pressure from Icahn and other activist stockholders, Temple-Inland on Monday said it will retain its corrugated packaging and building products, which accounted for roughly 75% of the $5.6 billion in 2006 revenues, and will spin off financial services business Guaranty Bank and its real estate unit Forestar Real Estate Group.

Temple-Inland also plans to sell off 1.8 million acres of timberland in Texas, Louisiana, Alabama and Georgia.

A trader said there are some issues underlying the breakup that will have to be resolved before he is altogether comfortable with taking a position, primarily involving union contracts.

Temple-Inland shares (NYSE: TIN) gained $7.06 on the news, or 12.85%, to $62.01. The trader said leeriness about the details of the breakup brought the stock off the day's high of $63.61, "and rightly so, because there is a lot we don't yet know about this plan."

Financial terms of the spinoffs and property sales have not been determined, the company said, but the majority of the proceeds from the sales will be returned to shareholders. The proposed separations are subject to the board of directors and other terms but are expected to be completed by year-end.

Icahn acquired a 6.7% stake in Temple-Inland in January and has advocated breaking up the company.

"Each of the three public companies - manufacturing, financial services and real estate - will be well-positioned in the marketplace, have an appropriate capital structure and will benefit from greater strategic focus," said Temple-Inland chief executive Kenneth M. Jastrow II in a statement.

Itron inks $1 billion buy

Spokane, Wash., maker of utility meters, Itron, gained Monday on its acquisition of Luxembourg-based Actaris Metering Systems for roughly $1.62 billion, including $578.5 million in debt.

Itron shares (Nasdaq: ITRI) rose by $3, or 4.7%, to $66.81 on the news.

Associated with the purchase, Itron also announced a $235 million PIPE transaction to sell 4,086,958 shares at $57.50 apiece, but the buyers of those shares were not known at press time. In addition, Itron said it has commitments for a $1.107 billion term loan related to the acquisition as well.

"This is easily the smartest acquisition I've seen so far this year," said one trader. "There are plenty of opportunities for cross selling these meters. No wonder the smart money [PIPEs participants] is backing it up."

Based on an expected closing in second quarter, Itron expects that in 2007 the acquisition will add $720 million to $730 million in revenue, $110 million to $115 million of adjusted EBITDA and contribute 20 to 30 cents in non-GAAP earning per share.

Itron said the combined company, which reunites two former divisions of oilfield services provider Schlumberger Ltd., would rank as one of the largest metering companies in the world.

AMD advances 7%

In addition to some analysts thinking AMD might be a target for private equity, a trader said it would make sense for AMD to turn up on the radar of a company like Hewlett-Packard Co. in order to better compete with Intel Corp.

"Reasons HP might buy AMD are pretty numerous," the trader said.

AMD shares (NYSE: AMD) advanced 99 cents, or 6.74%, to $15.68, while Hewlett-Packard shares (NYSE: HPQ) ended off by 53 cents, or 1.3%, at $40.29.

At the forefront of the trader's argument for Hewlett-Packard as a buyer for AMD, he said, is to compete with Intel's Itanium IP processor.

"HP needs a modern CPU to move Tandem non-stop technology to current generation processor technology. It would almost be a payback for years of Intel subsidizing Dell at HP's expense. HP would gain control of one vector of the future with less capital cost than it took to buy Compaq," he said.

Several analysts said an AMD buyout would make sense as well, pointing to AMD's balance sheet needing some work. There are still skeptics, however, because of the company's unattractive cash flow.

AMD posted a loss of $166 million for 2006 due to charges related to its acquisition of graphics chip maker ATI Technologies. The company ended the year with $1.54 billion in cash and cash equivalents, down from $1.8 billion at the end of 2005.

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