U.S. News

Burning Opposition

By Scott Reeves
WATCH LIVE

Investors Monday liked the planned $31.8 billion takeover of TXU, pushing shares in the Texas utility sharply higher, but environmental concerns could cause trouble ahead.

In what appear to be concessions, TXU says it will reduce the number of new planned coal-fired generation plans to three from 11 and cut rates 10% to save residential customers about $300 million a year, moves that could erode future earnings.

David Dreman, manager of Dreman Value Management in Jersey City, N.J. and owner of TXU shares, says the wild card in the deal is politics. CNBC’s David Faber first reported the deal was in the works Friday. 

“There’s some risk,” he says. “They’ve cut back on the number of (new) plants, but I think that takes a lot of the environmental heat off.”

But it’s not enough to satisfy Karen Hadden, executive director of Sustainable Energy & Economic Development in Austin, Texas.

“There are still quite a few things to be discussed,” she says. “The company still wants to pursue the Oak Grove plant east of Waco, the largest and we think the worst because it would put several areas are risk for non-attainment of clean air standards. We don’t think coal is the right way to go in Texas. We’re also concerned that they might think about nuclear power in the future.”

Hadden vows to take the fight to the Texas state legislature and, if necessary, to court. The prospect of a protracted court fight could make long-term investors gun shy.

In a prepared statement, the Rainforest Action Network, a San Francisco environmental group, says, “The pledge by TXU’s new owners reflects an emerging economic and political reality: any further investment in dirt, inefficient coal plants is risky business.”

Nevertheless, UBS Investment Research expects the deal to go through.

In a research note, UBS analyst Ronald J. Barone says regulatory approval "would probably be forthcoming," now that TXU has made "concessions" by cutting the number of plants and reducing user rates.


  
Barone says a competing bid is possible, but the high price tag could act as a deterrent. (UBS, its affiliates or subsidiaries have acted as manager of co-manager in the underwriting or placement of TXU’s securities or its affiliates in the last five years.)

“Pending required approvals, we expect the transaction to close in the second half of 2007,” Justin McCann, Standard & Poor’s Electric Utility Analyst, says in a research note.  

If completed, the deal would be the largest leveraged buyout in U.S. corporate history. Kohlberg Kravis Roberts and Texas Pacific Group will pay $69.25 a share for TXU, a 15.4% premium over Friday’s closing price of $60.02. The deal would surpass the previous leveraged buyout record, the $25.1 billion take over of RJR Nabisco, also by KKR, in 1988.

TXU shares may have been benefiting but those of Peabody Coal, Arch Coal, CONSOL Energy and Massey Energy were down in Monday trading.

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