M&A

Private Monday

Three big deals announced today follow a year of hyped LBO activity
Stephen TaubFebruary 26, 2007

It’s LBO Monday, thanks to a number of management-led buyouts. The most significant deal is the $45 billion buyout of TXU Corp. led by private equity firms Kohlberg Kravis Roberts & Co. and Texas Pacific Group. The deal, which includes $13 billion of assumed debt, makes it the largest leveraged buyout.

Under the deal, TXU agreed to make several changes to pacify environmentalists who had targeted the utility in recent months. In fact, the company’s announcement ntoed that the transaction was endorsed by Environmental Defense and Natural Resources Defense Council.

Some of the concessions include, a pledge by the company to increase its commitment to exploring renewable energy sources and investing in alternative energy technologies. It also agreed to reduce the number of coal-fired power plants to be built from 11 to three, preventing 56 million tons of annual carbon emissions.

“In addition, the company is committed to continuing its efforts to meaningfully reduce existing carbon emissions and seeks to join the United States Climate Action Partnership (USCAP),” it asserted in a press release, referring to a broad-based group of businesses and environmental groups organized to work with President Bush, the Congress, and other shareholders to enact an environmentally effective, economically sustainable and fair climate change program.

TXU also named former U.S. Secretary of State James A. Baker to serve as Advisory Chairman to the investment group of new owners. In addition, William Reilly, chairman emeritus of the World Wildlife Fund and former EPA Administrator, will join board of directors and lead the company’s effort in making climate stewardship central to corporate policies, the company pointed out.

TXU also said it will create an independent Sustainable Energy Advisory Board comprised of individuals who represent a number of interests, including the environment, customers, Texas economic development, and regional reliability standards. “This is a momentous event for our company in our long journey to transform TXU from a former integrated monopoly to high performance businesses,” said C. John Wilder, chairman and chief executive officer of TXU, in a statement. “The long-term capital, expertise and resources of the investor group will allow us to increase our focus on reliability, lower prices, [provide] outstanding customer service and innovative products, and [invest] in long-term environmentally sound technology.”

Also on Monday, Station Casinos said it agreed to an $8.8 billion acquisition by an investor group that includes Chairman and Chief Executive Officer Frank J. Fertitta, Vice Chairman and President Lorenzo J. Fertitta, and Colony Capital Acquisitions, LLC, an affiliate of Colony Capital, LLC. The deal includes the assumption of about $3.4 billion of debt. Meanwhile, insurance brokerage Hub International Ltd. agreed to be acquired by private equity firm Apax Partners for about $1.8 billion, including roughly $145 million of debt.

Bloomberg pointed out that all told, buyout firms have announced nearly $50 billion in takeovers so far this year, excluding Monday’s deals. This comes on top of the more than $700 billion in takeovers last year. Buyout funds are flush with cash, having pulled in $432 billion from investors in 2006, which was a new high, according to Bloomberg, citing London-based Private Equity Intelligence Ltd. As a result, deals are becoming bigger.

For example, the average price of the 10 largest buyouts worked out to $25.5 billion before the TXU deal was announced, Bloomberg noted. TXU’s record may be short-lived, however. Dow Chemical Co. may receive a $54 billion offer from buyout funds, according to Reuters, citing a report in the U.K.-based tabloid Sunday Express newspaper.

In a note to clients Monday morning, high-yield analysts from Bear, Stearns asserted that they believe a Dow LBO is possible despite the large size. However, they warn that it would be difficult to complete. “Given the inherent volatility of chemicals margins, we believe the company would need to be split up fairly quickly following a LBO in order to reduce debt to manageable levels,” the analysts wrote.

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