NRG Energy Inc. (NRG:US)’s $1.7 billion stock purchase of GenOn Energy Inc. (GEN:US) would create the largest U.S. independent electricity generator with more market strength to withstand slumping power prices and capitalize on an eventual rebound.
GenOn shareholders will receive 0.1216 share of NRG common stock for each of their common shares, representing a 21 percent premium over GenOn’s July 20 closing price, the companies said in a statement yesterday.The combined companies will operate under the NRG Energy name and have an enterprise value of $18 billion, according to the statement.
With the transaction, scheduled to close by the first quarter of 2013, NRG will surpass Calpine Corp. (CPN:US) as the largest independent U.S. power company by generation capacity.
By combining operations that will span the U.S. with about 47,000 megawatts of generation, the companies will be able to increase the size and scale of their operations while reducing costs, leaving them better positioned for an expected rebound in prices, the chief executive officers of NRG and GenOn said in a telephone interview yesterday
“In this industry, if you have the lowest cost structure, you are going to have success over time,” NRG CEO David Crane said in the interview. Crane will remain president and CEO of the combined companies. GenOn CEO Edward Muller will join NRG’s board as vice chairman.
NRG holders will own 71 percent of the new company, and GenOn holders the rest. The combined company will have its financial headquarters in Princeton, New Jersey and Houston will serve as its headquarters for operations, according to the statement. The combined companies’ board will have 16 members, with 12 directors from the NRG board and four joining from GenOn.
The transaction must be approved by shareholders of both companies, the Federal Energy Regulatory Commission (FERC), the New York Public Service Commission and the Public Utility Commission of Texas.
Independent producers, which sell power in competitive markets, have been hurt by a more than 30 percent drop in electricity prices since 2008. At the same time, operators are facing increasing costs to comply with new environmental rules. Independent generators produce electricity without a utility unit, which has its rates set by local regulators.
GenOn, based in Houston, had lost almost a third of its market value this year, closing at $1.82 on July 20, as slumping natural gas prices have dragged down the price of electricity, shrinking revenues. Princeton, New Jersey-based NRG has fallen 0.4 percent this year and closed at $18.05 on July 20.
NRG would add coal plants in the Mid-Atlantic with the GenOn purchase, following other independent power producers in consolidating to withstand falling power prices. NRG said the acquisition will allow it to expand its wholesale retail business in the Eastern U.S., where the bulk of GenOn generation is located.
“The greater depth and breadth gained through the combination with GenOn will put NRG in a uniquely strong position to fulfill the needs of American energy consumers in the 21st century,” Crane said in the company statement.
Power prices should eventually rise because there’s been a limited amount of new generation coming online to replace the planned retirement of older, coal-fired generators because of tougher environmental rules, Muller said in yesterday’s interview.
“If you are reducing supply, that means demand is going to go up,” he said. The closing of coal-burning plants generating 32 gigawatts have already been announced, with an additional 15 gigawatts to follow, concentrated in the Midwest and Southeast, based on Bloomberg New Energy Finance estimates.
Starting in 2014, the companies said they expect to add $300 million annually to free cash flow from cost savings, reduced interest expense and other efficiencies.
“Although it seems this combination could result in significant synergies, a crucial issue longer term is future power prices,” said Paul Patterson, a New York City-based analyst for Glenrock Associates LLC. “Given the challenging power price environment confronting competitive power producers, I think it is understandable that some might decide to consolidate in order to achieve greater economies of scale,” Patterson said in an interview.
The combined companies expect adjusted earnings before interest taxes, depreciation and amortization, or EBITDA, to be between $2.54 billion and $2.74 billion for 2013, and between $2.63 billion and $2.83 billion for 2014, they said in yesterday’s statement.
NRG said second-quarter adjusted EBITDA for the stand-alone company would be $530 million, and reaffirmed full-year 2012 adjusted EBITDA guidance to be between $1.8 billion and $2 billion. GenOn raised its 2012 stand-alone guidance for adjusted EBITDA to $467 million from $446 million.
The merger, worth about $4.2 billion including net debt, would rank as one of the largest sales of a power producer in history, according to data compiled by Bloomberg. Excluding spinoffs and bankruptcies, the only two rivaling it in size are NRG’s 2006 purchase of Texas Genco for $5.8 billion including debt, Dynegy Inc. (DYNIQ:US)’s 2007 acquisition of LS Power Group’s power plants for about $4.2 billion, and GenOn predecessor Reliant Resources Inc.’s 2002 purchase of Orion Power Holdings Inc. for $4.9 billion, the data show.
Muller, GenOn’s CEO, made a hostile $7.9 billion offer to buy NRG in 2006 when he was CEO of GenOn predecessor Mirant Corp.
NRG rejected the offer and said at the time that Crane had held previous talks with Mirant about NRG acquiring the company.
Mirant dropped the offer and, in 2010, merged with RRI Energy Inc. in 2010 to create GenOn.
NRG is second behind independent U.S. power producer Calpine by market value.
Separately, NRG said it would pay its first-ever quarterly dividend of 9 cents a share on Aug. 15 to holders as of Aug. 1.
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