45 billion dollar utility sale an environmental watershed
By International Herald Tribune
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The cash-and-debt deal would be the largest leveraged buyout in history. It still requires shareholders' approval. Kohlberg Kravis Roberts and Texas Pacific Group led a group that included Goldman Sachs and three other Wall Street firms. The firms vowed to cut electricity prices 10 percent, which they said would save TXU residential customers more than $300 million a year.
But it was the backing of two prominent environmental groups that set the deal apart. TXU was the whipping boy of the biggest U.S. environmental groups when Fred Krupp, president of Environmental Defense, received a telephone call two weeks ago from William Reilly, who was head of the U.S. Environmental Protection Agency under President George H.W. Bush. Reilly, who now works for Texas Pacific, said he wanted to negotiate a cease-fire. If the investors succeeded in taking over TXU, Reilly said, they would commit to scale back significantly on TXU's plan to build 11 new coal plants and adhere to a strict code of conduct.
In return, he wanted the support of Krupp and his peers.
The private equity firms seemed driven to reshape TXU's strategy as much for environmental concerns as for business ones. Because such firms are unregulated and historically have valued their privacy, neither Kohlberg Kravis nor Texas Pacific were eager to become an "enemy combatant" of the environmental groups, people involved in the talks said. Reducing the coal plant initiative will also free up billions of dollars in planned spending that the firms will be able to use for other projects or to help finance the transaction.
Within TXU, the plan to build a raft of coal plants had become so damaging to the company's stock price that its board had been privately weighing a plan to scrap part of its coal plant development project, according to people involved in the talks. Shareholders sent the stock on a roller coaster ride from more than $67 a share to as low as about $53 over concerns about the risk and vast expenditure.
Indeed, it was the quick drop in TXU's stock price that got the attention of Kohlberg Kravis and Texas Pacific, which look for undervalued companies and try to turn them around. Together, both firms approached C.John Wilder, chief executive of TXU, in early to mid-January with an offer for the company, these people said.
At the time, neither Kohlberg Kravis nor Texas Pacific told TXU about its ambition to scale back its controversial coal plants. But behind the scenes, both firms had been developing a new strategy for the company with the help of Goldman Sachs, their lead adviser.
Goldman Sachs has been a longtime proponent of reducing carbon emissions. Its former chief executive, Henry Paulson Jr., now the secretary of the U.S. Treasury, was also the chairman of the Nature Conservancy, an environmental advocacy group.
Texas Pacific's co-founder, David Bonderman, is member of the board of the World Wildlife Fund, and Reilly is chairman emeritus. Bonderman called Reilly to help work on the deal and create what they ultimately called the Green Group - a committee of advisers that included Reilly, Roger Ballentine of Green Strategies and Stuart Eizenstat, the former chief domestic policy adviser for President Jimmy Carter.
"We didn't want to be on the wrong side of history," said a person involved in the bidding group who was not authorized to talk about the transaction.
Kohlberg Kravis and Texas Pacific are paying $69.25 a share for TXU, a 20 percent premium to TXU's closing stock price Thursday, the last trading day before word of the deal began to leak out. They will also assume about $13 billion in debt. TXU stock rose $7.98, or 13.3 percent Monday to close at $68.
"As a private company, free from the short-term financial pressures affecting all public companies, TXU will be able to accomplish important goals for customer service innovation and new generation technology development on a scale and schedule that would otherwise not be possible," TXU said recently.
The private equity firms will be getting more than just a utility. TXU is in an experiment to run broadband Internet over its power lines as part of a venture with Current Communications.
But in the talks among TXU executives, investment bankers and private equity executives, perhaps the toughest bargainers in the deal were the environmentalists. Krupp of Environmental Defense used his conversation with Reilly as an opportunity to negotiate even harder for further concessions. The men agreed that Krupp's lieutenant, James Marston, who was leading the charge against TXU in Texas, would meet with Reilly and other representatives of the buying group.
So last week, Marston flew to San Francisco, where he found himself face to face with Reilly. Over scrambled eggs and croissants, Reilly laid out a plan that included cutting the number of new coal plants to 3 from 11.
Then the men went to Texas Pacific's offices for negotiations that stretched until 1 a.m. the next day. The group worked out a "10- point plan" that included a commitment by the investors to return the carbon-dioxide emissions by TXU to 1990 levels by 2020 and support a $400 million energy efficiency program.
