KKR, TPG pick up TXU for $45bn

The largest-ever private equity deal follows closely the previous record-holder, this month’s $39bn Blackstone-backed buyout of Equity Office Properties. The new owners of TXU will offer electricity customers price cuts.

Kohlberg Kravis Roberts and Texas Pacific Group have agreed to the largest buyout to date with an agreement to buy Dallas, Texas-based energy company TXU Corp. for $45 billion (€34 billion).

GS Capital Partners, Lehman Brothers, Citigroup and Morgan Stanley will also take part in the transaction as equity investors.

Shareholders will receive $69.25 per share at the close of the transaction. That value is a 25 percent premium over the average closing price over the 20-day period that ended on February 22.

The terms of the agreement allow TXU to solicit third-party bids until April 16, but TXU, KKR and Texas Pacific all expect the proposed deal to close in the second half of this year, according to a statement.

The company will keep its headquarters in the Dallas-Forth Worth area. It will remain under the jurisdiction of the Public Utility Commission of Texas, Nuclear Regulatory Commission and Federal Energy Regulatory Commission.

TXU’s chairman and chief executive officer, C. John Wilder, is also taking part in the deal.

The investor group has multiple plans for the company. “[W]e 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,” Henry Kravis, a KKR founding partner, said in a statement.

Price cuts and price protection are part of the announced plan to benefit Texas residents. TXU will reduce prices by 10 percent for those customers not already enrolled in a low-price plan. This reduction will generate more than $300 million in savings, the statement said. A 6 percent reduction will take place in about 30 days, and an additional 4 percent reduction will occur at the close of the transaction. Such reductions will bring TXU’s prices to the lowest in their markets.

“An unprecedented level of price protection will be in place through September 2008, ensuring that these customers receive the benefits of these savings through two summer seasons of peak energy usage,” the statement said.

The company will also be restructured to contain three independent divisions. The energy generation unit will be known as Luminant Energy and will include the power, wholesale, development and construction businesses.  The transmission and distribution unit, currently known as TXU Electric Delivery, will become Oncor Electric Delivery. The retail unit will maintain its current name, TXU Energy.

In brokering the deal, the firms addressed environmental concerns brought up by a number of individuals and advocacy groups. Plans to build coal units have been reduced from 11 plants to three. This is a 75 percent reduction in coal capacity, and it will reduce TXU’s annual carbon emissions by 56 million tons, the statement said.

William Reilly, chairman emeritus of the World Wildlife Fund and a former administrator of the Environmental Protection Agency, is one of many individuals who will join the company upon the completion of the deal. Reilly will become a member of the board of directors, and he will also lead the efforts to make climate stewardship an integral part of the company’s corporate policies.

Also joining the board of directors are Donald Evans, the former US secretary of commerce, James Huffines, chairman of the University of Texas Board of Regents, and Lyndon Olson, Jr., former Texas representative and former US ambassador to Sweden.

James Baker, the former US secretary of state, will become the advisory chairman to the investment group. Baker was formerly a senior advisor to The Carlyle Group.

TXU serves more than 2.1 million customers in Texas. Its generation methods include nuclear and coal-fired generation. It is also the largest supplier of wind-generated electricity in Texas and the fifth largest in the US.

Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley provided committed financing to this deal. Credit Suisse and Lazard were advisors for TXU.

This largest-ever buyout follows closely on the heels of the previous record-holder, The Blackstone Group’s $39 billion purchase of Sam Zell’s US real estate company Equity Office Properties on February 7. That deal trumped the $33 billion buyout of US hospital chain HCA by Bain Capital, KKR and Merrill Lynch Global Private Equity last July. The HCA buyout took the title of largest-ever away from KKR’s buyout of RJR Nabisco in 1988.