Private Equity Firms Slated to Buy TXU for Record $45 Billion

TXU Corp. (TXU), Texas' largest electricity producer, said Monday it has agreed to be sold to a group of private-equity firms in what would be the largest private buyout in U.S. corporate history if shareholders go along.

The deal carries a total value of $45 billion, which includes about $13 billion worth of debt.

Kohlberg Kravis Roberts & Co. and Texas Pacific Group led a group that included Goldman Sachs & Co. (GS) and three other Wall Street firms that will pay $69.25 per share for TXU.

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.

They also agreed to cut electricity prices 10 percent, which they said would save TXU residential customers more than $300 million per year, and limit prices until September 2008.

TXU directors voted Sunday night to recommend that shareholders approve the sale. The price represents a 25 percent premium to TXU's recent average closing stock price.

The deal tops the previous biggest buyout ever of $25.1 billion set in 1988 when RJR Nabisco was acquired by Kohlberg Kravis.

Private-equity firms have often steered clear of utilities, viewing them as highly regulated businesses with relatively low return on investment. But Texas deregulated its electricity market in 2002, and TXU is generating tremendous amounts of cash and profit — Wall Street expects the company to report Tuesday that it earned about $2.5 billion in 2006.

TXU, with more than 2.3 million customers, has prospered because electric rates in Texas are tied to the price of natural gas while TXU generates much of its power more cheaply at coal and nuclear plants.

Still, TXU had flaws that might make buyers think twice. Many Texas consumers have switched to other companies that sell electricity for less, although most of TXU's longtime customers have stood by it.

Goldman Sachs, Lehman Brothers (LEH), Citigroup (C) and Morgan Stanley (MS) intend to be part of the TXU purchasing group, TXU said.

TXU also said former Secretary of State James A. Baker III will serve as advisory chairman to the new owners, and former EPA Administrator William Reilly and former Commerce Secretary Donald L. Evans will join the TXU board.

In recent months, environmentalists have blasted TXU in publications and advertisements, and controversy over the proposed coal plants was seen as one reason that TXU's stock price had fallen recently after a mighty four-year rise.

Texas Pacific tapped Reilly, one of its partners, to strike a compromise that won support for the sale from two environmental groups in exchange for cutting back TXU's coal program.

Henry Kravis, founding partner of KKR, pledged to make TXU into "a more innovative, customer-centric, environmentally friendly company." He said the private-equity buyers — who are often viewed as short-term investors looking to resell — see TXU as a long-term asset.

David Bonderman, 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."

Those remarks could be read as a rebuke to current management and Chief Executive C. John Wilder.

In a statement, Wilder said the expertise and resources of the buyers would let TXU "increase our focus on reliability, lower prices, outstanding customer service and innovative products, and investments in long-term environmentally sound technology."

TXU had struggled near bankruptcy in the early part of the decade before a turnaround that began in 2004 made the company highly profitable again. The dramatic rise in TXU's stock price stalled, however, making it an attractive takeover target.

The company has planned to build 11 coal-fired power plants, saying Texas needs more power to satisfy a growing population. But opponents contend that adding coal-fired plants would be unwise with concern rising over greenhouse gas emissions and the effect on the environment.

Over the weekend, KKR and Texas Pacific agreed to drop eight of the proposed plants while going ahead with three in central Texas if they take control of the company. The bidders also agreed not to propose new coal-fired plants outside Texas and to support mandatory national caps on emissions linked to global warming.

The move not only helped win support from some of the company's loudest critics, but also might have increased pressure on TXU to sell by casting more doubt on the coal strategy.

David Hawkins, director of the Natural Resources Defense Council's climate center, said that even if the KKR-Texas Pacific bid failed, their endorsement of limits on coal-generated power would make it much harder for TXU to build the plants.

A group of public-interest investor groups issued a report Sunday saying TXU's $10 billion estimate of the coal-plant buildup was too low. They said TXU would face higher costs to meet tougher regulations on emissions and overcapacity if conservation cuts demand for power.

Last week, a state court judge dealt TXU's plans a setback by blocking a fast-track process for air permits. That led to a four-month delay in public hearings.

TXU was near bankruptcy in 2002, when it lost $4.2 billion, and was forced to sell units in Europe and Australia and returned to its roots, selling electricity to Texans. The company rebounded, earning $1.72 billion in 2005, and Wall Street expects TXU to report Tuesday that it earned $2.5 billion in 2006, according to analysts surveyed by Thomson Financial.