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The $45 billion buyout of Dallas power generator TXU Corp. led by Kohlberg Kravis Roberts & Co. and TPG became a reality Oct. 10, and can bill itself as the largest-ever leveraged buyout, for now. The sale of the company's debt will be closely watched for indications of just how much markets have rebounded after this summer's credit crunch. A downgrade came as the six banks underwriting the financing geared up earlier in the week to market $5 billion of the nearly $35 billion they agreed to commit. But given TXU's credit risk profile, they may ultimately be able to sell much more, The Deal's Vipal Monga and Claire Poole point out. (See more below on the markets.)
From a regulatory standpoint, the deal moved closer to reality Sept. 11 when the Nuclear Regulatory Commission approved the deal, following the green light from shareholders (Sept. 7), the Federal Energy Regulatory Commission's stamp of approval (Sept. 6) and a major shareholder changing course, throwing its support behind the buyout, the week before. The $69.25 per share take-private is the largest ever stateside and second only to the pending $49.2 billion takeover of Canadian telecom BCE Inc. TXU announced the buyout Feb. 28 and at the time pointed to: price cuts, stronger environmental policies and continued dialogue with Texas regulators for "new TXU." A 50-day go-shop period ensued, during which TXU contacted 70 prospective bidders, but the company said April 19 it had not found any takers. The deal has not been without challenges and opposition. THE MARKETS In March, Monga contended: "The giant buyout will take six months or so to close. That's a long time to bet that capital markets will remain serene." They didn't, but that's not necessarily bad news for TXU, as Monga wrote in September:
In July, a report from AFX News/Thomson Financial indicated banks might pull out, opting to pay the $1 billion breakup fee. A source connected to one of the lenders, however, told The Deal the report was absolutely false. PULLING OUT THE STOPS
Beyond market factors, the buyout demanded shareholder and regulatory approval. Texas regulators tried to pass a bill that would enable the Texas Public Utility Commission oversight of the deal, but to no avail. In April, former Secretary of State James Baker and Rep. Joe Barton came down on opposing sides of the deal. Baker, a senior partner with Baker & Botts LLP and heading up the team advising TXU's buyers, contended the sale would be good for consumers and an improvement over the current management. Barton, a Texas Republican and ranking member on the Committee for Energy and Commerce, called the deal "bad for Texas" this spring, arguing for the FERC to have more authority over the buyout, saying rates are already high and would likely increase upon the deal's close. The utility has made several promises to appeal to customers and environmentalists alike, like price cuts and walking from plans to build eight of 11 coal-fired power plants. Some highlights:
When it looked as if the deal could still fail, TXU threatened in a filing with the SEC Aug. 13 that a three-way breakup could follow. Pointing to market, legislative and regulatory challenges, the company said it could spin off its three core units — transmission, generation and retail electricity — but that it considered the buyout premium superior and that "a future premium in a standalone situation would be less likely," Poole wrote. INDUSTRY IMPACT The deal could set the stage for other buyouts, possibly one for bankrupt California electricity generation giant Calpine Corp., or Mirant Corp., an independent power producer based in Atlanta, which said in April it was weighing strategic alternatives. —Carolyn Murphy
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