NRG still up for deal; Alpha forecast to close coal buy; CIT unable to rule out bankruptcy

By Cristal Cody

Tupelo, Miss., July 21 - While NRG Energy, Inc. said Tuesday the energy company is still open to a deal at the right price after Exelon Corp. abandoned its takeover attempt, a market analyst told Prospect News the company has little merger appeal.

In other deal action, a market observer said Tuesday that a shareholder of Alpha Natural Resources, Inc. that plans to vote against the $1.5 billion acquisition of Foundation Coal Holdings Inc. should not be able to stop the merger alone.

Also on Tuesday, analysts and investors remain concerned that bankruptcy is still a possibility for CIT Group Inc., a day after the company secured $3 billion in loans from its bondholders.

Meanwhile, investors continued the weeklong stock gains to Tuesday.

The Dow Jones Industrial Average rose 67.79 points, or 0.77%, to close at 8,915.94.

The Standard & Poor's 500 index inched up 3.45 points, or 0.36%, to 954.58, and the Nasdaq Composite index added 6.91 points, or 0.36%, to end at 1,916.20.

Exelon walks

Exelon stuck to its promise and said in a statement on Tuesday that it will abandon its $8 billion stock offer to acquire NRG after shareholders rejected Exelon's nominees to the board.

"The NRG shareholders have spoken, and Exelon will move on," John Rowe, Exelon's chairman and chief executive officer, said in a statement.

Chicago-based Exelon had said on July 15 it would walk if shareholders did not approve its proxy fight.

Princeton, N.J.-based NRG shareholders voted Tuesday at the annual meeting to re-elect all four of NRG's incumbent directors to the board and rejected Exelon's proposal to expand the board.

"NRG stockholders understood that this vote was all about value and they voted overwhelmingly to send a message that Exelon's current offer was unfair to NRG stockholders," David Crane, NRG's president and CEO, said in a statement.

Exelon said that the company "could have been successful in completing the transaction, but it was unwilling to raise its price to a level that would undermine Exelon's own value proposition."

Exelon had offered 0.545 of a share of Exelon for every NRG share in a bid valued at about $28.37 a share. Exelon had originally offered 0.485 of a share when it announced the proposal in October 2008.

Analysts had said that Exelon would need to raise its bid by at least 10.00% to attract NRG's interest.

Crane said in the statement that NRG is still open to a deal.

"Our stockholders share the same commitment as the company's management and its board of directors to maximizing value either through continued effective implementation of the company's standalone business plan or through combination with Exelon or another interested party at a price that reflects the value NRG has created and our future growth prospects," he said.

NRG shares jumped $1.27, or 5.39%, to close Tuesday at $24.82.

Jefferies & Co. analyst Paul Fremont told Prospect News on Tuesday that NRG's stock had been trading at a substantial discount to other energy generators.

"So we felt if Exelon were to walk away, that NRG's share price would go up," he said. Investors view the standalone valuation as "attractive."

NRG's appeal to another buyer is probably a long shot, Fremont said.

"One of the problems with acquiring these types of companies is they're heavily leveraged. It's not clear to me they would be attractive to a third party," Fremont said.

Exelon's stock gained $1.28, or 2.46%, to close at $53.33.

Coal buyout steams on

Alpha and Foundation Coal shareholders are scheduled to vote July 31 on the merger.

Shareholder approval is the only condition to the offer outstanding and the deal should close in early August, a market source said Tuesday.

Duquesne Capital Management, LLC, which holds 8.31% of Alpha's outstanding stock, said on Monday the firm will not support the merger over concerns about exposure to lower profit-making markets.

"We believe that the statement by Duquesne has increased the risk that Alpha shareholders will vote against the deal. However, we believe that a negative vote is unlikely," the market source said.

On July 15, Duquesne Capital Management increased its stake in Alpha to 8.31% from 7.70%, the source said.

"Duquesne now holds 8.31% of Alpha's shares, but is only able to vote 7.70% as the additional holding was acquired after the record date for the EGM [extraordinary general meeting] of June 25," the source said. "The merger needs approval from a simple majority of total Alpha shares outstanding."

Also, more than 25.00% of Alpha shares are estimated to be held by shareholders with shares in Foundation Coal.

"These shareholders are unlikely to vote against the merger, as Foundation shares are likely to fall to [less than] $25.00 if the merger does not complete," the source said.

Under the terms of the agreement, Foundation Coal shareholders would receive 1.084 shares of the new company for each share of Foundation Coal, which values the stock at about $32.73 a share. Each share of Alpha would automatically become one share of the combined company.

Alpha said in a statement that it has received support from shareholders and four leading proxy advisory firms.

The combination of Linthicum Heights, Md.-based thermal coal producer Foundation Coal and Abingdon, Va.-based steelmaking metallurgical coal supplier Alpha would create one of the country's leading coal companies.

David Khani, an analyst with FBR Capital Markets Corp., said in a research note released Tuesday to Prospect News that coal company valuations are becoming more appealing.

"Over the past three months, the coal and global mining industry has raised over $31 billion in debt and equity capital and announced several billion dollars in asset sales," said Khani, who has a $40.00 stock price target on Alpha and a $44.00 price target on Foundation Coal shares.

"Based on our 31-company group, we calculate that the global mining industry has $73.60 billion of debt outstanding through the next 11+ years, down from $86.90 billion," he said. "Furthermore, we expect another $3.70 billion of announced divestments to help further de-lever the space, subject to the acquirer's financing vehicle."

Foundation Coal's stock rose 55 cents, or 1.76%, to close at $31.79 on Tuesday.

Alpha shares added 31 cents, or 1.03%, to $30.41.

CIT works sources

CIT said in a regulatory filing on Tuesday that the lender may file for bankruptcy if the cash tender offer for its outstanding notes due Aug. 17 fails.

In an 8-K filing with the Securities and Exchange Commission, CIT said it must have a restructuring plan in place by Oct. 1 under the loan credit facility.

CIT estimates it will have funding needs of $7 billion of unsecured debt for the year ending June 30, 2010.

CIT also said it expects a loss for the second quarter of more than $1.5 billion.

The New York-based company, which was founded in 1908 and operates in more than 50 countries, is a major lender to small and mid-sized companies.

Sameer Gokhale, an analyst with Keefe, Bruyette & Woods, Inc. told Prospect News in an interview that the $3 billion loan will help - a little.

"It would help them stave off a bankruptcy event for the near term and possibly give some time to restructure additional debt," he said. "But unless they get enough, bankruptcy is not off the table yet."

CIT has about $13 billion in debt that matures from the third quarter through the end of 2010, Gokhale said.

"If they can get enough of that debt refinanced or restructured, that would give the company a substantial amount of time to deal with all the issues they're facing," he said. "However, if not, at the end of 2010, the company is right back where it started."

Shares of CIT closed down 27 cents, or 21.60%, at 98 cents on Tuesday.

Mentioned in this article:

Alpha Natural Resources, Inc. NYSE: ANR

CIT Group Inc. NYSE: CIT

Exelon Corp. NYSE: EXC

Foundation Coal Holdings Inc. NYSE: FCL

NRG Energy, Inc. NYSE: NRG

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