A buyout deal that has many shades of green

By Andrew Ross Sorkin

The New York Times

About two weeks ago, Fred Krupp, the president of a nonprofit advocacy group called Environmental Defense, received an unusual phone call.

William K. Reilly, the former administrator for the Environmental Protection Agency under President George H. W. Bush, was on the other end. But before Mr. Reilly would explain the reason for his call, he said he needed an assurance from Mr. Krupp that he would keep the conversation confidential.

After receiving such a pledge, Mr. Reilly dropped a bombshell: the TXU Corporation, the Texas energy giant that had become the whipping boy of the nation’s largest environmental groups, was in talks to be sold to a group led by Kohlberg Kravis Roberts & Company and Texas Pacific Group, two large private equity firms.

Mr. Reilly, who works for Texas Pacific, said he wanted to negotiate a cease-fire. If the investors succeeded in taking over TXU, Mr. Reilly said, they would commit themselves to scale back significantly on TXU’s plan to build 11 new coal plants and adhere to a strict set of environmental rules. In return, he wanted the support of Mr. Krupp and his peers, who had spent the past several months waging a bitter and public war against TXU.

Early Monday, after several weeks of marathon negotiations that brought together both environmentalists and Wall Street bankers, TXU announced that its board of directors had approved the bid from Kohlberg Kravis and Texas Pacific for about $45 billion, which would be the largest buyout in history.

The deal was noteworthy not just for its size, but for the confluence of business decisions and environmental concerns that drove the ultimate transaction. Because private equity firms are unregulated and historically have valued their privacy, neither Kohlberg Kravis nor Texas Pacific were eager to become an “enemy combatant” of the environmental groups, people involved in the talks said. Reducing the coal plant initiative will also free up billions of dollars in planned spending that the firms will be able to use for other projects or to help finance the transaction.

Within TXU, the controversial plan to build a raft of coal plants had become so damaging to its stock price that its board had been privately weighing a plan to scrap part of the project, said people involved in the talks, bringing the number of new plants to 5 or 6 from 11.

Shareholders had sent the stock on a roller coaster ride from more than $67 a share to as low as about $53 over concerns about the risk and vast expenditure; the stock closed at $60.02 on Friday.

Indeed, it was the quick drop in TXU’s stock price that got the attention of Kohlberg Kravis and Texas Pacific, which look for undervalued companies and try to turn them around. Together, both firms approached C. John Wilder, TXU’s chief executive, in January with an offer for the company, these people said.

At the time, neither Kohlberg Kravis nor Texas Pacific told TXU about their ambition to scale back its controversial coal plants. But behind the scenes, both firms had been developing a new strategy for the company with the help of Goldman Sachs, their lead adviser.

Goldman Sachs has been a longtime proponent of reducing carbon emissions. Its former chief executive, Henry M. Paulson, now the secretary of the treasury, was also the chairman of the Nature Conservancy, an environmental activist group.

Texas Pacific’s co-founder, David Bonderman, is member of the board of the World Wildlife Fund, and Mr. Reilly is chairman emeritus. Mr. Bonderman called Mr. Reilly to help work on the deal and create what they ultimately called The Green Group, a committee of advisers that included Mr. Reilly, Roger Ballentine of Green Strategies and Stuart E. Eizenstat, the former chief domestic policy adviser for President Jimmy Carter.

“We didn’t want to be on the wrong side of history,” said a person involved in the bidding group who was not authorized to talk about the transaction before its formal announcement.

Under the terms of the deal, TXU shareholders will receive $69.25 in cash for each TXU share. Goldman Sachs, Morgan Stanley, Lehman Brothers and Citigroup will take small stakes in TXU as well as help finance the debt with J.P. Morgan Chase. In addition, the investor group will assume more than $12 billion of TXU’s debt.

The deal represents a 20 percent premium over TXU’s closing price on Thursday before word of the deal began to leak and was reported Friday on CNBC after the market closed, TXU said.

It is unclear whether shareholders will agitate for a higher price from the investor group or push for other suitors to emerge. Several recent “go private” deals have drawn opposition from shareholders who expressed concern that they were being shortchanged.

Monday’s merger agreement allows TXU’s board to solicit bids from other potential buyers through April 16, and TXU said it intends to do so.

The investor group has not laid out any specific plans to grow revenues through alternatives to the coal plants, but TXU is not likely to lose money, at least initially, as a result of scaling back. Three of the plants are already in the works and other eight that will be canceled would not have been built for years.

And the group will be getting more than just a utility. TXU is in the midst of an experiment to run broadband Internet over its power lines as part of a venture with Current Communications.

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