TXU surges on buyout buzz; National Grid, KeySpan lower; Exelon spikes; XM, Sirius off

By Ronda Fears

Memphis, Feb. 23 - After the close, market chatter that private equity firms Kolberg Kravis Roberts & Co. and Texas Pacific would announce a buyout offer for Dallas-based TXU Corp. on Monday sent the stock rocketing in after-hours activity; moreover, the event would bring to fruition remarks Prospect News has been hearing for several weeks now about private equity eying the utility sector.

"There was no specific price mentioned, although it is being speculated at a record - beyond the $39 billion Blackstone paid for EOP. It also explains the [TXU] price movement in the last couple days; it has been steadily moving up since Wednesday," a utility stock trader remarked, referring to The Blackstone Group's buyout of Equity Office Properties Trust.

"I have been saying that because of the increasing demand for electricity in the U.S. and the leverage at a lot of utilities, they would be a prime target for private equity. It also will be a great test of regulatory system and how these deals can get done. If it makes it, we could see a whole lot more."

He acknowledged, however, that utility mergers are oftentimes challenging, noting that the proposed buyout of Aquila Inc. by Great Plains Energy Inc. announced earlier this month seems to be designed to pass regulatory scrutiny but it is meeting with severe resistance from stockholders.

Earlier in the day, too, a slam to the National Grid plc's acquisition of KeySpan Corp. by regulatory staff in New York caused a slump in those stocks; the staffers criticized that deal as good for stockholders but less beneficial to ratepayers.

In any event, traders said it was a light session Friday due to the lack of news flow. Thus, traders were rehashing the news of the week, highlighted by the XM Satellite Radio Holdings Inc. merger with Sirius Satellite Radio Inc. XM (Nasdaq: XMSR) was off 24 cents to $15.10, while Sirius (Nasdaq: SIRI) lost 6 cents to $3.74 on Friday.

The urge to merge by the satellite radio companies reflects challenges to achieving profitably in the evolving digital media market, some onlookers say. But in addition to the antitrust issues facing XM and Sirius, another trader pointed to industry reports about the logistical difficulty of their merger - integrating the satellites themselves.

As an extension of that, he said Loral Space & Communications Inc. could be affected by the XM merger with Sirius as both have a new geostationary satellite on order from the satellite builder and in the event of a merger they would likely cancel one of the spacecraft. Yet, he remains bullish on Loral because of its acquisition of Telesat Canada and sale of Satelites Mexicanos SA de CV, or SatMex. Loral shares (Nasdaq: LORL) added 4 cents to $51.11 on Friday.

Elsewhere, investment banks perceived as having large exposure to the mortgage market - Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. - also fell Friday as the pack of subprime mortgage lenders continued to freefall. Goldman shares (NYSE: GS) lost $2.47 on the day, or 1.13%, to $216.50.

Such angst aside, another trader said the slide at Goldman was aggravated by an accounting investigation at Sanyo Electric Co. by the Securities and Exchange Surveillance Committee in Japan, which caused a 21% loss in Sanyo shares in Tokyo. He said the Sanyo news has serious implications for Goldman, which helped bail out the company last year by purchasing $2.6 billion worth of preferred shares. He said the market had thought Goldman was close to selling off its stake in Sanyo at a large profit before the scandal surfaced.

TXU surges 16% after-hours

TXU shares traded heavily and moved sharply higher in after-hours activity on the rumors that KKR and Texas Pacific would announce a buyout bid on Monday, and the news was no surprise to some utility players. Also of note, TXU is slated to report fourth-quarter and 2006 results on Tuesday.

After a couple of days of steady gains, TXU stock (NYSE: TXU) closed Friday better by $2.38, or 4.13%, to $60.02 with about 7 million shares traded versus the norm of 3.34 million shares.

Following the closing bell, when the buyout buzz was heavily circulated, the stock traded as high as $71.48, but the last trade, at 6:55 p.m. ET, was at $69.65 - a gain of 16% from the close. Some 308,300 shares moved in the after-hours market.

One report pegged the deal as the biggest private equity takeover ever by enterprise value, the utility stock trader said, adding that the Dallas-based regional electric utility has an enterprise value of $38.8 billion, so any premium would make the deal bigger than the EOP deal smack at that level earlier this year, which set a record.

He said there was speculation that the TXU deal would be $40 billion, which with 459.2 million shares outstanding would put it at $87 per share - a 45% premium to Friday's close. But he said it was unclear as to whether the $40 billion figure includes the $12.4 billion debt on TXU's books or not.

"None of that is totally out of line with where PE deals have been," the trader said.

"The problem they are going to run into, though, is with the regulators if they leverage this puppy up - debt to equity now is at 7.3 times. They won't go for it. It's not as simple as other PE buyouts where you just have to please stockholders. But it will be very interesting to watch."

In January, the utility stock trader remarked to Prospect News that he expected utilities would garner some attention in the private equity buyout frenzy because of rising electricity demand. He said population growth patterns in Texas makes TXU a very attractive target, but he still sees several in the Midwest and Florida as prime takeover targets as well.

National Grid, KeySpan off

From the gas utility side of the industry, regulatory resistance, for example, is thwarting London-based National Grid's proposed $11.8 billion acquisition - based on valuations when the deal was announced in February 2006 - of KeySpan.

KeySpan shares (NYSE: KSE) dropped 21 cents on the session to $41 with 856,600 shares traded versus the norm of 459,767 shares. National Grid shares in the United States (NYSE: NGG) dipped 21 cents, or 0.27%, to close Friday at $77.01.

Despite the Federal Energy Regulatory Commission giving its stamp of approval in October to the National Grid purchase of Brooklyn-based KeySpan, on Friday staffers at the New York Public Service Commission staff were questioning whether it would be in the best interest of residents in its service areas. The staff report said the deal favors shareholders but could lead to higher rates and worse service for ratepayers.

"They were stating the buyout was agreed to at an inadequate price among other things," the utility stock trader said.

National Grid proposed to pay $7.3 billion in cash, and assume $4.5 billion of KeySpan debt.

It would be National Grid's fifth largest distributor of natural gas in the United States and the largest in the Northeast, operating regulated gas utilities in New York, Massachusetts and New Hampshire that serve 2.6 million customers. The British utility giant also owns several U.S. electric utilities. Since 2000, it has acquired New England Electric System and Eastern Utilities Associates and Niagara Mohawk.

National Grid and KeySpan are to respond to the New York regulatory staff report in March.

Exelon spikes; trader leery

Another example of regulators throwing a wrench in utility combos, the trader said, is Exelon Corp.'s $17 billion takeover of Public Service Enterprise Group Inc., which was nixed last September by regulatory snags after more than 18 months of haggling. He also noted that Exelon shares were sharply higher Friday, but he was leery of the advance.

Exelon (NYSE: EXC) gained $2.70 on the day, or 4.2%, to $66.93 with 5.94 million shares traded versus the norm of 2.5 million shares.

The trader said the gain was being attributed to an upgrade in the stock by Citigroup to buy from hold, citing the electric utility's long-term exposure to the implementation of carbon emissions caps in the United States and a modestly better near-term earnings outlook.

But he said there is more negative overhang for Chicago-based Exelon and he would be a seller into the rally.

"The rate freeze in Illinois could continue another three years and, in my opinion, this stock is about to get its biggest smack down in many, many years," the trader said.

Exelon owns Commonwealth Edison Co., better known as ComEd, which has complained to Illinois rate regulators about the threat of bankruptcy since at least 2001, the trader said. But a move in Illinois to extend a rate freeze in that state could be a serious problem for ComEd, he said. ComEd has issued a press release critical of the rate freeze, saying that it would cause losses of $4 million a day, or $1.4 billion annually, and put the company in jeopardy of bankruptcy.

Exelon in September called off its all-stock acquisition of Newark, N.J.-based PSEG, saying that delays in getting approval from the New Jersey Board of Public Utilities revealed resistance that was "insurmountable."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.