NRG Squeezed by Credit Crunch as Exelon, Buffett Hunt

By Jim Polson

Oct. 21 (Bloomberg) -- NRG Energy Inc., Calpine Corp. and Mirant Corp., U.S. power producers involved in failed takeover attempts in the past three years, are under increasing pressure to accept buyouts because of the credit freeze.

``There's been a sea change in access to capital in this industry,'' said Hugh Wynne, a utility analyst at Sanford C. Bernstein & Co. in New York.

Exelon Corp., the biggest U.S. utility company by market value, offered this week to buy NRG for $6.2 billion in stock in a bet that its superior creditworthiness will allow for refinancing of NRG's $8 billion in debt at lower costs. The credit crunch prompted Constellation Energy Group Inc., the largest U.S. power marketer, to accept a $4.7 billion cash offer last month from Warren Buffett's MidAmerican Energy Holdings Co.

The bids surfaced after Princeton, New Jersey-based NRG lost half of its market value in two months and Constellation's share price was halved in a week. Just two years ago, Baltimore-based Constellation had a deal, which was later dropped because of state opposition, to be acquired by FPL Group Inc. for $12.4 billion. NRG rejected a $7.86 billion takeover offer from Atlanta-based Mirant in 2006.

The power producers may be forced to consider mergers with larger companies, because as in the case of Constellation, the credit crisis may erode their ability to support energy contracts, Wynne said. Houston-based Reliant Energy Inc., owner of power plants in eight U.S. states, lost more than half its market value in September, then hired Morgan Stanley and Goldman, Sachs & Co. to review strategic options.

Debt Reliance

``You had a lot of Reliants, companies that made extensive use of short-term debt for working capital,'' Wynne said. ``Now that looks, perhaps, imprudent.''

Reliant made a $350 million preferred stock deal that allows it to pursue strategic alternatives, including a possible sale, after losing a credit agreement with Merrill Lynch & Co. that backed its energy purchases and sales. The preferred stock was part of $1 billion in financing that will cost about 3.5 times as much as the Merrill arrangement, according to Carl Blake, an analyst at Gimme Credit in New York.

Utility owners such as MidAmerican and Chicago-based Exelon previously had to compete with banks and investment funds to acquire more generating capacity. Buyers led by KKR & Co. bought the biggest Texas power producer, the former TXU Corp., in a record leveraged buyout last year.

EDF Won't Bid

Electricite de France SA, Constellation's largest shareholder, said this month that after talking to KKR, it couldn't challenge the Buffett bid.

``The debt market is prohibitively expensive,'' said Greg Phelps, who helps manage $2.8 billon at MFC Global Investment Management in Boston.

That may leave the field open to cash-rich utility owners like Exelon, whose stock has gained value as an acquisition currency because it has fallen less than shares of independent, or merchant, power producers such as NRG.

``Many of the larger utilities have significantly strengthened their balance sheets in the past five years, and that gives them flexibility,'' said Barry Abramson, who helps manage about $30 billion at Gamco Investors in Rye, New York. ``They can issue stock as their currency.''

NRG's owners would get 0.485 share of Exelon for each of their shares, valuing the company at $26.43 a share, Exelon said in an Oct. 19 statement. NRG traded above $39 as recently as Aug. 28.

`Consolidation Needed'

NRG yesterday urged shareholders not to take any action on Exelon's proposal, saying it's reviewing the offer.

``This is the right time for consolidation and consolidation is needed,'' Exelon Chief Operating Officer Christopher M. Crane said yesterday in a telephone interview. ``Others should be looking, if they aren't already.''

Exelon Chief Executive Officer John Rowe, 63, said he met with NRG's CEO, David Crane, 49, on Sept. 30 to discuss a possible merger. ``In view of the general state of the turbulence of the markets, we were not close enough to negotiate an agreement,'' Rowe said yesterday on a conference call.

Rowe said NRG became an attractive target after its stock plunged. Exelon's offer represented a 37 percent premium over NRG's Oct. 17 closing price.

`Opportunistic Buyers'

``You have deep-pocketed, opportunistic buyers who can take advantage of distressed situations,'' Phelps said. ``But there's only one Warren Buffett and only one Exelon.''

NRG should reject the Exelon offer, said Gordon Howald, an analyst at Calyon Securities USA Inc. in New York who rates the company's shares ``buy'' and owns none. NRG's power plants alone are worth $63 a share, more than double Exelon's offer, based on transactions over the past two years, he said.

``If they accept it as it is, I'd view that as a pretty bad indictment of how bad companies believe this credit crisis is,'' Howald said.

The ratio of shares Exelon offered in its bid is fair based on current and historic stock prices for the companies, Rowe said on yesterday's conference call. Exelon ``will do what it takes to consummate this deal,'' Rowe added, turning aside questions on whether he would offer a higher price or appeal directly to shareholders should the original bid be rebuffed.

Calpine Rejected NRG

NRG was spurned in May on an $11 billion, unsolicited offer for Calpine. Houston-based Calpine jumped 18 percent to $12.45 yesterday in New York Stock Exchange composite trading, increasing its market valuation to almost $5.3 billion.

NRG surged 29 percent to $25 after the offer. Reliant advanced 17 percent to $6.06, and Atlanta-based Mirant climbed 13 percent to $18.70. Houston-based power producer Dynegy Inc. rose 12 percent to $3.63, and AES Corp. of Arlington, Virginia gained 21 percent to $9.89. Exelon rose 9 cents to $54.59.

Mirant, NRG and Calpine all reorganized under bankruptcy protection after the collapse of Enron Corp. in December 2001 led to more onerous credit requirements for energy trading and a U.S. power glut dragged down prices.

Mirant on Sept. 22 suspended share buybacks to assure adequate funding of two plant projects in California, adding that it had ``no liquidity issues.'' The stock fell 8.3 percent the day of the announcement.

Calpine announced after trading closed Oct. 1 it had borrowed $725 million from its $1 billion master credit agreement as a ``proactive financial decision to preserve our liquidity by increasing our cash position.'' The stock fell 14 percent the next day.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net.