AFL-CIO backs TXU buyout(3)

The AFL-CIO has sent a letter to TXU shareholders recommending that they approve KKR’s and TPG’s buyout bid, which will be voted on 7 September.

The AFL-CIO, the largest federation of trade unions in the US, has reportedly recommended that TXU shareholders vote to approve the company’s $45 billion (€33 billion) buyout by Kohlberg Kravis Roberts and TPG. In a letter to the shareholders, the union said that due to “turmoil in the equity and debt markets”, TXU is unlikely to receive a better offer.

“It seems highly unlikely that shareholder opposition to this offer will elicit improved transaction terms,” the letter said. The letter noted that no other buyers have offered better terms than KKR and TPG’s $69.25 per share bid, and also pointed out that TXU shares are currently trading well below this price, implying that the market is anticipating the possibility that the deal will not close and the price may fall further.

TXU shareholders will vote on the merger on 7 September. As of late July, TXU’s largest shareholder, Franklin Resources, said it would oppose the buyout on the grounds that KKR and TPG’s bid undervalues the company.

The proposed buyout has come under fire on many fronts since it was announced in February. In response to criticism from longtime TXU critics Natural Resource Defense Center and Environmental Defense, KKR and TPG agreed to invest $6 million per year over the next five years toward air pollution reduction in central Texas, in addition to other environmental concessions.

The firms won the support of the International Brotherhood of Electrical Workers union after agreeing to terminate TXU’s existing, 10-year labor subcontracting agreement valued at $8.7 billion. KKR and TPG also agreed to a 15 percent price cut for TXU customers after the Texas legislature introduced a bill that would have given it the power to block the buyout amid concerns about rising electricity prices. The bill was defeated on a technicality in May.

Though the AFL-CIO supports the TXU buyout, the union has attacked KKR in other arenas. Earlier this month the union wrote a letter to the Securities and Exchange Commission asking that KKR and hedge fund Och-Ziff Management be regulated as investment companies rather than publicly traded limited partnerships in their upcoming initial public offerings.

The change would require the firms’ to publicly disclose information about their finances and operations. The union said in the letter said that the two firms’ activities, particularly KKR’s ownership of $11.9 billion in mortgage-backed securities, would present a risk for potential investors. The AFL-CIO sent a similar letter to the SEC in advance of The Blackstone Group’s June IPO.