UPDATE 1-TPG invests $500 mln for stake in gas co Valerus

By Megan Davies NEW YORK, Nov 2 (Reuters) - Private equity giant TPG Capital is investing $500 million to buy a majority stake in Houston-based natural gas handling services company Valerus Compression Services, the companies said on Monday. TPG, one of the largest private equity firms in the world, has been an active investor in energy. It was one of the investors that took power company TXU Corp, now Energy Future Holdings Corp, private in October 2007, for $44 billion. It was also part of a consortium that in 2004 bought Texas Genco, then the second-biggest power generating company in the state, for $3.7 billion. The consortium later sold Texas Genco to NRG Energy Inc for about $5.8 billion in February 2006. TPG will own a majority stake in Valerus by investing in the company's debt and equity. Management, employees and other current investors will hold the remainder. Proceeds from the investment will be used to provide capital for Valerus' growth plans and to refinance and reduce its existing debt, according to a person familiar with the transaction. Co-founder and Chief Executive Officer Chet Erwin will continue at the helm, while Dan Smith will become chairman. Smith was chairman and CEO of Lyondell Chemical Co, and was running that company when it was acquired by Basell in 2007. LyondellBasell is owned by billionaire Len Blavatnik's Access Industries. Smith is also chairman of the board of Kraton Polymers. The investment is an example of one of the different kinds of deal structures private equity firms have been pursuing since the credit crisis limited access to cheap debt. That halted the large leveraged buyout deals that had characterized the 2005-07 boom. TPG told investors in a letter in May that it was seeing a "full pipeline of investment opportunities" outside of LBO deals. The Valerus deal -- one of TPG's largest investments this year -- will be substantially made out of TPG's $19 billion buyout fund, TPG VI, according to the source who spoke to Reuters. Investors originally committed about $20 billion to the TPG VI fund, but TPG later allowed them to reduce their commitments, a source told Reuters in December, which brought the size down to about $19 billion. TPG also told investors in October that it planned to return $20 million in fees paid on the fund. GAS POTENTIAL TPG partner Michael MacDougall said in a statement that Valerus was poised to benefit from the continued development of America's natural gas resources, and the growth in gas production from the country's shale. Shale gas, or gas trapped in sedimentary beds, is seen as having the potential to provide the United States with affordable fuel that will help drive economic growth, reduce dependence on foreign oil and limit emissions for decades. The company also has the potential for more international growth, TPG said. Valerus, which competes with companies such as publicly traded rival Exterran Holdings Inc, provides natural gas handling equipment and services, such as natural gas compression, processing and treating. Exterran's shares were 2 percent lower in afternoon trading at $19.99. J.P. Morgan and Tudor, Pickering, Holt & Co. Securities, Inc advised TPG on the deal. Valerus was represented by Barclays Capital. TPG, formerly Texas Pacific Group, is one of the largest private equity firms in the world. Its founding partner, David Bonderman, is considered to be one of the most influential figures in the U.S. private equity industry. (Editing by Gerald E. McCormick and Maureen Bavdek) (([e-mail] ; [phone]; Reuters Messaging: [e-mail])) Keywords: TPG VALERUS/ (For more M&A news and our DealZone blog, go to http://www.reuters.com/deals) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.