Another Mega-deal Financed by Debt, as Texas Utility TXU Purchase is Said to Be a $45B Deal

The proposed $45B (including debt) private equity takeover of Texas energy utility TXU brings the use of private funds in the purchasing of major companies into focus. The environmental deals struck as part of the purchase are also of major interest to those who are concerned with the so-called "carbon market" in the age of "global warming" concerns.

Increasing numbers of private equity takeovers have been occurring in recent years, many involving significant amounts of debt to finance the transaction. Unions and others have been pointing to this factor as a concern in driving electric rates higher, and also the possibility that the highly leveraged new owners would cut maintenance spending and proceed to resell all or part of the company, a practice common in unregulated parts of the industry, according to USA Today. Other states have expressed concerns about such strategies in responding to potential investments by Texas Pacific, one of the investors, along with Kohlberg Kravis Roberts.

Another part of the deal, intended to sway regulators whose approval will be required, is the cutting of eight of eleven proposed coal-fired power plants, sources of the "greenhouse gas" carbon dioxide. A replacement for this planned generating capacity was not mentioned in the USA Today article, although the potential buyers spoke of investments in energy efficiency and renewable energy as part of the deal.

A Reuters report quoted a source as saying that further deals in the sector could be encouraged by the focus on the environment, and USA Today noted that moguls such as Bill Gates and Warren Buffett had taken notice of the activity in the "staid sector."

A local Austin, Texas television station reported that while the deal would require close regulatory scrutiny for some time to come, it had a positive reception among some environmentalists, while noting that future global warming related regulation could make the cutting of eight plants a win for the utility. Still, a representative of Public Citizen noticed that even three coal-fired plants could make breathing difficult at times in the summer for residents of Austin.

The Financial Times notes that the TXU deal is yet another in a series of private equity deals which are taking advantage of cheap debt, with the $38.9B purchase of Equity Office, a commercial property group, coming in close behind in value. It notes that, particularly in Europe, politicians and trade unions, among others, see the purchases as an unhealthy trend. The benefit of heavily debt-financed acquisitions of major companies is seen as potentially unhealthy economically.

$32B bid for TXU may not clear regulatory fences, USA Today, February 26, 2007 (Print Edition)

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http://us.ft.com/ftgateway/superpage.ft?news_id=fto022320071926305862

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