Saturday, February 24, 2007

the next "biggest buyout" ever...kkr may buy txu

$ 71.00 10.98 (18.29%)! that's the after hours reaction on the next escalation level involving private equity. as one traditional fund manager would say .....

I fail to understand why it's a good idea for clients to take money away from me and give it to private-equity groups who charge higher fees for buying quoted shares at a 20% premium.”

once upon a time utility companies were bought because of their high dividend yield and strong balance sheets.. the dividend was already close to 3% and would now be just over 2%. very impressive.....the payout ratio for the latest dividend was 35% (but watch the investment plans down the road...). the rating agencies have already put junk ratings on txu. fitch is just one notch above. you can guess that this means the balance sheet doesn´t look "healthy". normally they increase the debt to fuel their extra/special dividend and /or sell assets as fast as they can. i don´t want to be a bondholder these days..........

more likely is that the deal will fell through because the regulator will take action

i can remember that the asset sale from the german rwe for thames water (supplies london with water) in the uk the regulator has put restriction on the buyer how much leverage they can put on thames. that has limited the price rwe could get for thames. but the regulator was very concerned that thames could not provide a good service and make enough investments in the core business. here is a stat from txu

Capital Spending - 5 Yr. Growth Rate -0.38 (from reuters, others in the industry are worse)

but here are the plans
In 2006, TXU expects to invest $2.6 billion in capital expenditures, roughly 100 percent of expected net income, in order to improve reliability and customer service and meet the urgent and growing electricity needs of Texas. For 2006 through 2010, TXU plans to invest more than $17 billion in capital expenditures, more than 135 percent of expected net income, .....(will this investment plan stay in place when kkr takes over?!and who ahould buy txu when kkr wants to cahs out in the next few years?)

i think that should be a great concern for this kind of deal. regardless of what the regulator will do i hope that the bondmarket will send a clear warning sign like this one....but i doubt it.......

20% aufschlag auf ne versorgeraktie die bereist extrem gelaufen ist. es scheint fast so als wenn die nächste stufe gezündet wird. ich kann mich noch an zeiten erinnern wo versorgeraktien wegen der hohen dividendenrendite und den starken bilanzen gekauft worden sind. bei txu betrug die rendite knapp über 3% nach dem aufschlag nahe 2%. bis auf fitch haben alle ratingagenturen die bereits auf junk heruntergestuft. sollte der deal durchgehen wird es weiter gen süden gehen. evtl. aber stoppen aber die behörden den deal. aus angst die firma könnte mit zu hochen schulden beladen werden und dann nicht mehr in der lage sein zu investieren und die versorgung zu gewährleisten. (siehe die aufstellung oben was txu plant...bin mir sicher das diesen bei kkr anders aussehen wird.)

so ist es rwe bei thames water gegangen. dort mußte der käufer einer maximalen kreditbelastung zustimmen die der regulierer auferlegt hat. so sind rwe einige 100 mio$ durch die lappen gegangen. evtl. aber revoltieren ja auch die anleihebesitzer die diesen deal letztendlich finanzieren sollen..... das die ne deutlich warnung aussprechen bezweifele ich allerdings........

Feb. 23 (Bloomberg) -- Kohlberg Kravis Roberts & Co. is poised to buy Texas utility owner TXU Corp. in the biggest-ever leveraged buyout.

The board of Dallas-based TXU is set to vote on the proposal this weekend......

The purchase price is not yet final, the person said. Shares of TXU surged as high as $70 in after-hours trading, valuing the company at about $32 billion. With TXU's $16 billion in debt, the transaction may be worth more than $48 billion....

``An acquisition by KKR will be a blow to TXU's credit quality because leverage would increase substantially,''...``Leveraged buyouts of utilities have been relatively rare.''

TXU shares have jumped sixfold since 2002, when failed expansions overseas helped push the company near bankruptcy..... The company's credit is rated Ba1 by Moody's, one level below investment grade.

overview taken from their latest filing / übersicht aus dem letzten filing

Current credit ratings for TXU Corp. and certain of its subsidiaries are presented below:

Current credit ratings for TXU Corp. and certain of its subsidiaries are presented below:
TXU Corp.
US Holdings
TXU Electric Delivery
TXU Energy Company
(Senior Unsecured)
(Senior Unsecured)
(Senior Unsecured)
(Senior Unsecured)

moody´s outlook is stable. fitch and s&p have already a negative outlook.

State Approval
Any sale of TXU, the largest power producer in Texas with more than 18,300 megawatts, would need the approval of the Texas Public Utility Commission. ....

``It's important to remember that we have had two private equity buyers turned down by state utility commissions,'' ...``A lot of these state agencies frown on the extra leverage placed on these assets by the private-equity groups.'' .....

``Regulators frown upon leveraged buyouts because it increases the riskiness of the utility and their ability to service their customers,'' Egan said.

Credit Risk
Credit-default swaps based on $10 million of TXU's bonds rose $770 to $84,380 as ... It was the first increase since Feb. 14. A rise in the cost of the contracts, used to speculate on a company's ability to repay debt, signals deterioration in the perception of credit quality.(i hope that this isn´t the full reaction from the bondmarket...the reaction on monday should give an good indication how many innings are left in this mania..../ man kann nur hoffen das dieses nicht bereits die ganze reaktion war....montag wird wohl aufschluß geben wieweit das ganze noch gehen kann)

Closely held buyout firms such as KKR use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance their deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors in initial public offerings. ( the deals in europe are also souring / in europa geht ebenfalls die post ab)

Buyout Boom
Private-equity firms announced a record of more than $700 billion in takeovers last year and almost $50 billion so far this year, Bloomberg data show. Investors, seeking returns that exceed stocks and bonds, poured $432 billion into buyout funds last year.....
KKR has raised $16.1 billion for a new U.S. buyout fund and expects to reach its cap of $16.6 billion, a person familiar with the matter said Jan. 11.

``They're taking a very big political bet,'' said David Dreman, who helps manage $22 billion at Dreman Value Management including TXU shares. ``If things go well for TXU they're going to put on seven to nine coal-fired plants. KKR must have a degree of certainty they can get it done. There could be major upside.''

Coal Plant Controversy
TXU has stirred controversy in Texas in the past year with its plan to build as many as 11 coal-fired generators at a cost of $10 billion. Environmentalists, the mayors of Houston and Dallas and some state lawmakers have said the plants will make the state's air pollution problems unmanageable.

The company's biggest rival in the race to build new generation in Texas is NRG Energy Inc., which bought a Texas power company called Texas Genco from a group of buyout firms including Texas Pacific and Kohlberg Kravis in 2005 for $5.8 billion.

CNBC reported the possible acquisition after exchanges closed. TXU shares had gained $2.38, or 4.1 percent, to $60.02 in New York Stock Exchange composite trading, the biggest one- day gain in more than nine months. They jumped another $10 in extended trading. ......

``Maybe the right assets going to the private equity group could be acceptable,'' Abramson said, adding that the regulated portion might eventually end up with another company.

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