By Jim Polson
Nov. 24 (Bloomberg) -- NRG Energy Inc. urged its shareholders to reject a hostile $6 billion takeover offer from Exelon Corp. that would create the largest U.S. power producer.
“A combination with Exelon will dilute and might derail NRG’s growth,” Princeton, New Jersey-based NRG said today in a filing with the U.S. Securities and Exchange Commission. NRG currently is the second-largest power producer in Texas, behind closely held Energy Future Holdings Corp.
Exelon offered 0.485 of a share for each NRG share directly to holders on Nov. 12 after the power producer’s board turned down an identical offer Nov. 9 as too cheap and potentially risky for investors. NRG was required to respond to the offer within 10 business days under U.S. securities rules.
“The price is the same, so the answer is the same,” NRG Chief Operating Officer Robert C. Flexon said today in an interview.
Talks between the companies, initiated by JPMorgan Chase & Co. on Sept. 24, fell apart Sept. 30 at a meeting in New York when Exelon Chief Executive Officer John W. Rowe refused to discuss an exchange ratio of Exelon shares for those of NRG, according to the filing.
Today’s regulatory filing clears the way for NRG management meetings on the bid with individual shareholders. Exelon senior executives found NRG shareholders and bondholders “supportive” of the offer, Executive Vice President Ruth Ann Gillis said in a Nov. 20 interview.
“Our shareholders have widely supported us,” Flexon said. “They realize this exchange ratio vastly undervalues NRG.”
Exelon has told investors its goal is a negotiated agreement that would leave in place $4.75 billion of senior notes at NRG, reducing refinancing costs that would be required in a hostile takeover. NRG also has about $4 billion of bank debt.
Holders of NRG’s senior notes have the right to sell them back to the company at $1.01 for each $1 of principal upon change of control at the company. Exelon wants NRG to agree to a merger it says would avoid triggering that provision, according to its filing.
The filing was made after regular trading closed on U.S. markets. Exelon rose $3.11, or 6.2 percent, to $53.11 in New York Stock Exchange composite trading. That raised the value of its offer to $25.76 a share. NRG rose $2, or 11 percent, to $21.
Proxy Fight
Exelon is prepared to take a proxy battle to NRG’s annual shareholders meeting next year if Chief Executive Officer David Crane and his board refuse talks, Gillis said. Exelon is the largest U.S. producer of nuclear power with 17 reactors and owns utilities in Illinois and Pennsylvania.
“They’ve never really adequately explained to my mind why they are doing this,” Jim Halloran, who manages about $34 billion at National City Private Client Group in Cleveland. Exelon is among his top holdings at 1.12 million shares. “I’ve never seen a rationale of why this makes sense.”
Halloran, interviewed before NRG’s announcement, said he’d not been courted by either company.
The exchange offer is scheduled to expire Jan. 6 at 5 p.m. New York time, after which Exelon must report how many shareholders accepted it. The offer can be extended.
“I would find very surprising if NRG went back to Exelon after taking such a hard line,” Gordon Howald, an energy analyst with Calyon Securities in New York, said in an interview before the announcement.
NRG owns 44 percent of the South Texas Project nuclear plant, as well as power stations that burn Wyoming coal and Texas lignite, cheap fuels in a state where natural gas tends to dictate electricity prices.
The combined company could save $180 million to $300 million a year, Gillis said.
NRG rejected that argument Nov. 9, saying refinancing its debt would “waste” as much as $500 million a year.
To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.
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