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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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TXU Corp. (TXU) |
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Selected Analyst Coverage (Target): Wachovia — Market Perform ($62-68) A.G. Edwards — Hold Credit Suisse — Restricted ($60 last) |
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TXU Closed at $64.19 on 3-8-07 |
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Released 3-9-07 |
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TXU Corp. (ticker: TXU) is the holding company that manages several energy businesses in Texas, including both regulated and competitive markets. Including assumed debt, TXU is the subject of a $45 billion buyout offer from Kohlberg Kravis Roberts (KKR) and Texas Pacific (TPG) that has drawn regulatory scrutiny that values the company’s stock at $69.25 per share. Because of the significant 8% spread (not including dividends of 2.7% annually) between the current market price and the buyout offer price, this report will focus on whether or not the deal is likely to be completed, allowing speculators to cash in on the difference. · Concurrently with announcing a 33% increase in quarterly earnings, TXU Corp.’s Board of Directors announced it had approved a buyout offer from a combined KKR-TPG partnership. The major hurdle the partnership needs to clear is with Texas regulators, who were recently given expanded authority to essentially oversee this deal. · Although early rumor had the potential for a rival bid emerging, perhaps from Blackstone Group, we do not believe such an offer is likely. TXU Corp does have until the middle of April 16th to shop the company for other offers, again, however, we do not feel another bidder will emerge to compete with KKR-TPG. A higher offer would benefit those long TXU stock in anticipation of the original KKR-TPG deal closing, though. · While energy deregulation in Texas had appeared to eliminate the Public Utilities Commission (PUC) oversight of such deals, oversight was quickly “restored” in a subcommittee vote, which is now being given to the general State Legislature. We feel that much of this action is grandstanding and parochialism by Texas politicians, and are confident that the KKR-TPG consortium will assuage their fears/egos sufficiently to avoid having a deal blocked. · One area of concern has been TXU Corp.’s residential prices, which are approximately 20% above the national average per kilowatt hour. The new ownership has pledged to cut prices by 10% through 2009, which demonstrates an initial good faith effort to negotiate on rates. While the Texas PUC may press for larger rate cuts, KKR-TPG seem committed to closing this deal and we would not be surprised to see further concessions. · TXU Corp. has drawn criticism for its plans to meet Texas’ future energy needs with 11 new coal-fired plants. Executives from KKR and TPG have pledged to move forward with only 3 of those plants, with plans for the other 8 being scrapped in exchange for support for their takeover from environmental groups. · Because of the current $69.25 buyout offer, TXU should no longer be considered as trading like a stock; rather, TXU is now an arbitrage play on whether or not the merger will be successfully completed. This will likely bring increased volatility to the stock, as well as less correlation to the overall market. · The most recent closing price offers a difference of $5.06 in potential profit between a $69.25 buyout and present value. Assuming the deal closes on the last day of 2007, TXU stockholders would also receive two dividend payments currently estimated at a total of $0.865, for a total potential appreciation of $5.925/share. This would be a 9.23% gain for an holding time of 42 weeks, or an annualized gain in excess of 11.5%. · Right now we estimate there is a 75% chance that the TXU deal will close smoothly and on schedule, and feel the risk-reward profile could be attractive for experienced traders.
Disclosure: The analyst has no position in TXU or its derivatives. |
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