Stock Plunge Makes NRG Appeal to Exelon

Its hostile bid of $6.2 billion could create the nation's largest power company.
Stephen TaubOctober 20, 2008

In an indication of how hostile M&A activity can accompany a stock-market nosedive, Exelon Corp. offered to buy rival power producer NRG Energy Inc. for $6.2 billion.

Exelon’s all-stock offer, intended to be tax free, represents a 37 percent premium to the Oct. 17 closing price for NRG shares. The stock price, however, is down more than 40 percent since May. If completed, the deal would create the largest power company in the U.S.

“An Exelon-NRG combination would result in a total enterprise value of approximately $60 billion with a generating capacity of around 47,000 megawatts, or enough electricity to serve nearly 45 million homes,” said John W. Rowe, Exelon chairman and CEO. “This combination would not only diversify Exelon’s generation portfolio geographically, it would also create immediate earnings and cash flow accretion. We believe a combination of Exelon and NRG would represent an exceptional value for shareholders of both companies.”

NRG, which wants to build two nuclear power plants in Texas, the first in the U.S. in three decades, is a highly leveraged company, with over $8 billion of debt and a credit rating of Ba3/B . The combination of Exelon and NRG will reduce the leverage associated with NRG’s current business and enhance its credit rating, Exelon said.

Exelon also said a substantial amount of NRG debt may need to be refinanced upon a change of control of NRG.

In a written response on Monday morning, NRG said its board would review Exelon’s proposal with their advisors and determine the appropriate response. “NRG stockholders are advised to take no action at this time pending the review,” it added.

Some experts expect NRG to reject the offer. In fact, CNBC pointed out that the offer values NRG at 5-1/2 times free cash flow. Exelon is currently trading at 7 times EBITDA. CNBC said that some investors think that NRG is worth closer to at least 8 times EBITDA, or roughly 50 percent higher than Exelon’s offer.

In response to the offer, Gimme Credit downgraded Exelon’s debt to Deteriorating from Stable. “Exelon’s bid for NRG, while strategically sound, is expected to result in a reduction of Exelon’s credit ratings,” it said in a note issued Monday morning. “The company says it is committed to restoring those ratings.”

NRG is no stranger to hostile bids, either as predator or prey. In May Calpine rejected NRG’s $11 billion offer for Calpine, and discussions between the two companies ended in August. And in May 2006, Mirant offered $7.86 billion for NRG in an unsolicited takeover offer. Mirant pulled the offer the following month when it realized it would face a long battle with its target company.

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