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KKR, TPG-led consortium to acquire TXU

26 Feb 2007

An investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group has agreed to acquire Dallas-based energy company TXU Corp. in a transaction valued at $45bn - the largest private equity transaction to date. GS Capital Partners, Lehman Brothers, Citigroup and Morgan Stanley intend to be equity investors at closing.

Under the terms of the agreement, TXU shareholders will be offered $69.25 in cash for each share of TXU common stock held. This represents a premium of 20 per cent to the closing price of TXU shares on 22 February 2007, the last trading day before press speculation about the transaction, and a 25 per cent premium to the average closing share price over the 20 days ending on 22 February 2007.

The TXU board of directors has approved the merger agreement and has recommended that TXU’s shareholders adopt the agreement.

‘As a result of this transaction, the newly privatised company will deliver price cuts and price protection benefits to electric customers, strengthen environmental policies, make significant investments in alternative energy and institute corporate policies tied to climate stewardship,’ the official statement said, advertising the deal and the benefits of large private equity-backed public-to-private transactions, which have recently caused political discussions.

The former US Secretary of State James A Baker, III will serve as advisory chairman to the investment group of new owners. William Reilly, chairman emeritus of the World Wildlife Fund and former EPA Administrator, will join the board of directors and lead their efforts in making climate stewardship central to corporate policies. Donald L Evans, former US Secretary of Commerce; James R Huffines, chairman of the University of Texas Board of Regents; and Lyndon L Olson Jr, former Texas State Representative and former US ambassador to Sweden, will join the board of directors.

TXU will be reorganised into three independently operated businesses: Generation – Luminant Energy will be the new company name, reflecting its new direction and encompassing TXU’s power, wholesale, development and construction businesses;
Transmission and Distribution – TXU Electric Delivery will be renamed Oncor Electric Delivery; and Retail – TXU Energy will retain use of its name for the retail business. Headquarters for each of the three businesses will remain in the Dallas/Fort Worth area.

Henry Kravis, founding partner of KKR, said, ‘TXU has outstanding employees dedicated to meeting the increasing long-term energy needs of Texas. We have listened to the various TXU constituencies, including customers, Governor Perry, Lt. Governor Dewhurst, Speaker Craddick, members of the Texas Legislature and those expressing environmental concerns. As a result, we have developed a new vision with management of how we can turn TXU into a more innovative, customer-centric, environmentally friendly company, and we plan to work with management to implement it. Our experienced energy team looks forward to providing strong support for this transformation, including making substantial, long-term capital investments in new innovation across each business – from customer product and service offerings including demand side management, to generation and grid technologies, and superior risk-management strategies. We intend to hold this as a long-term asset, and we recognize the need to balance growth with environmental considerations.’

David Bonderman, founding partner of TPG, added, ‘With the support of the government and environmental leaders, TXU’s new approach will better manage the delicate balance between the energy needs of a growing Texas population, responsibility to the environment and the cost concerns of Texas businesses and residents. We believe we’ve designed an innovative plan that meets the needs of all constituencies and reflects TXU’s enhanced commitment to the shared goal of making Texas the most responsible, state-of-the-art electric market in the nation. We look forward to working with TXU’s experienced management team and talented employees in the years ahead to make this exciting vision a reality.’

This is the largest private equity deal to date, following the $39bn acquisition of Equity Office and the $33bn buy-out of HCA.

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