NRG Pursues Calpine in Takeover Bid

By Published On: May 23, 2008

Once the object of desire in a failed hostile takeover, NRG Energy is now the unwanted suitor. NRG is pursing an unsolicited merger with Calpine to expand its generating capacity from 24,110 MW to 45,000 MW, NRG announced May 21. The reported price NRG said it would pay for all of Calpine’s stock was between $9.6 billion and $11 billion. NRG said it was offering a 16 percent premium on the stock priced at the close of business on May 13, or $23 per Calpine share. Calls to the two companies to verify the price tag were not returned before press time. “The floodgates are open,” said Gary Ackerman, Western Power Trading Forum executive director. “I wouldn’t be surprised if other bidders joined the fray.” NRG privately solicited buying out Calpine’s stock May 14. “The combined company would be the culmination of what we in this industry have aspired to become,” David Crane, NRG president and chief executive officer, and Howard Cosgrove, board chair, wrote to William Patterson, Calpine’s chief. “We hope you share our enthusiasm for bringing our two great companies together,” they said. A less-than-enamored Calpine would only state that it was “reviewing the proposal to determine if it is in the best interest of Calpine’s shareholders.” Its finance advisor is Goldman Sachs. NRG owns four power plants in Southern California–El Segundo, Carlsbad, Long Beach and San Diego–with a total generating capacity of 2,085 MW. Calpine owns a fleet of power plants and geothermal projects in California with 4,368 MW of capacity–3,643 MW of which are from the gas-fired units Under the terms of Calpine’s bankruptcy exit financing deal, any change of control requires a refinancing of its $6 billion in debt, according to Swami Venkataraman, Standard and Poor’s analyst. “That means a higher cost of debt.” He added that NRG would be buying a weaker company that is more financially leveraged. The ratings agency derated NRG to a B+, and bumped Calpine’s credit rating up to B May 22. Shareholders in both companies must approve the takeover. If completed, the enlarged NRG would be a major power producer in four regions of the U.S: California, Texas, the Northeast, and South. NRG valued this combined market at $38 billion. It also claims combining the firms would save at least $100 million a year in costs. Both NRG and Calpine, which soared then crashed during and after California’s 2000-01 energy crisis, ended up in bankruptcy court to stave off creditors and restructure their firms. Houston-based NRG emerged from federal bankruptcy court in 2003. Calpine’s Chapter 11 bankruptcy chapter closed at the end of January of this year. In 2006, Mirant was hot in pursuit of NRG, but the latter successfully fended of the unwanted marriage. There were other noteworthy industry relationship activities on the energy scene in 2006. NRG bought out Dynegy’s 50 percent ownership of their joint venture, West Coast Power, two years ago. Dynegy was then no longer a player in the California scene. Shortly after exiting the California market, Dynegy reentered via its purchase of LS Power, a private equity firm and power plant owner, which months earlier bought Duke Energy’s plants in the Golden State. Also in 2006, Mirant–another power company to land in and later emerge from bankruptcy–went from acquirer to acquiree. A powerful shareholder, Pirate Capitol that owned 1.6 percent of the company shares, tried to force Mirant’s sale. Mirant’s nascent Contra Costa 8 power plant, now dubbed Gateway, was subsequently bought by Pacific Gas & Electric. It is now about 60 percent developed, according to the utility.

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