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Activist investor Paul Singer's bid to overhaul power producer NRG Energy paid off handsomely on Wednesday as investors sent the stock price soaring.
Shares of NRG surged about 25 percent to about $20.45 after the company announced a transformation plan that, if successful, would reduce its debt load and free up billions of dollars for strategic purchases and shareholder payouts.
Singer, the hedge fund titan behind Elliott Management, revealed his stake in NRG in January, along with plans to push for strategic and operational changes aimed at increasing value for shareholders. He partnered with Bluescape Energy, an investment firm chaired by utility industry heavyweight Charles John Wilder Jr., to build a position big enough to lobby for change.
Elliott secured a spot for Wilder and former Texas Public Utility Commission chairman Barry T. Smitherman on NRG's board in February, and the two were involved in a four-month review of the company's business.
NRG Energy one-year performance
The result of the review is a plan to raise $2.5 to $4 billion by divesting 50 to 100 percent of its NRG Yield renewable energy business and some of its conventional energy assets, which includes coal and natural gas plants. NRG also aims to remove $13 billion in debt from its balance sheet and generate $855 million in annual free cash flow.
If the plan is 100 percent successful, it will generate $6.3 billion in cash through 2020, which NRG expects to spend on projects or investments.
That is a tall order, but investors have faith in Wilder, the former CEO and chief executive of Texas electric utility TXU Corporation. Wilder turned around TXU and positioned it for a successful 2007 sale, said Neel Mitra, director of power and utilities at Tudor Pickering Holt.
"They have some very aggressive cost cuts, and the reason as to why people are buying into them is this business review committee was run by John Wilder, who is pretty much regarded as one of the most powerful and successful names in the power industry," he told CNBC.
"His name behind that committee is adding some credibility to some pretty large numbers," said Mitra, who advised buying the stock at current levels.
Travis Miller, director of utilities at Morningstar, agreed that investors are likely betting on Wilder's success. However, he said he sees nothing fundamental in the transformation plan that would justify such a sharp stock move. He believes NRG could struggle to generate the kind of financial flexibility it is targeting.
"The big variable here is going to be how much money they get for selling these assets," he said, noting NRG's estimates of $2.5 to $4 billion.
"That's a huge range, and the asset market right now has been very weak. To get to that $6 billion cash number, it's going to require some pretty favorable prices for their power plants they're selling in particular."
In his view, NRG's problem is not the debt tied to its renewables business, but weak power markets that are hurting profit margins and valuations in its fleet of conventional power plants.
Still, the market reaction is a coup for Singer and Elliott Management at least for the moment. NRG was up about $4.25 a share on Wednesday. Elliott holds roughly 18.1 million shares, according to Factset, representing a roughly $77.4 million profit on the day. The stock is up about 39 percent since Singer revealed his initial investment.
It's also a bit of good news as Singer battles Warren Buffet over Berkshire Hathaway's proposed $9 billion takeover of Oncor, the huge Texas utility spun out of TXU. Elliott has threatened a $9.3 billion counter-offer.