Making a Better Trade: Exelon bids for NRG Energy
Exelon is one of the largest electric and natural gas utility companies in the
United States. In October 2008, Exelon offered to acquire all of NRG Energy's
outstanding common stock in an all-stock transaction. The purchase of the
Princeton, N.J., power generator would create the largest power company in the
country in terms of assets and market capitalization. Exelon said the purchase
would be a better trade for both sides.
"There is simply no doubt that scale is important in turbulent times and it's
important as the costs of growth continue to rise," Exelon chairman John W.
Rowe said in a conference call.
Exelon's offer was for $6.2 billion in stock, a 0.485 share of Exelon for each
share of NRG. NRG has 44 generating stations in Southern California, Texas,
Pennsylvania, Delaware, New York and Connecticut.
The NRG people (including NRG investor Warren Buffett) do not see this
acquisition as a better trade for their company. In March 2009, NRG Energy
filed a lawsuit that claims the hostile takeover violates U.S. securities
laws. The suit contends that Exelon submitted misleading facts to the NRG
shareholders and that a deal can't be consummate because of regulatory
concerns.
The main issue involved with the sale, which will help determine whether the
purchase will actually be a better trade, is credit. Exelon assumes that bond
covenant regulations will force it to refinance $8 billion in debt, if it buys
NRG. That could mean double-digit interest rates, although corporate officials
are hopeful the deal could be renegotiated with the current bondholders, which
would allow them to avoid refinancing. That is a big sticking point for NRG
shareholders, who don't like the idea of taking on huge debt.
After the initial offer was rebuffed, Exelon said it was willing to wait until
a new board of directors was elected at the NRG shareholders meeting. The
veiled threat was that Exelon would pack the board with officials friendly to
the takeover.
Exelon (the parent company of Commonwealth Edison) covers a wide array of
states in the Midwest and Mid Atlantic region. The proposed NRG deal would
force Exelon to sell some assets in Texas and in either the Pennsylvania or
Delaware areas, and would give Exelon a broad geographic swath and give it
access to plants that use a variety of fuels.
In 2008, NRG requested permission to build two nuclear reactors southwest of
Houston. It was the first time in 30 years than any company had asked to build
a new nuclear plant. Exelon also has plans to build a nuclear plant in the
same vicinity.
Exelon is attempting to reduce, offset or displace more than 15 million metric
tons of greenhouse gas emissions per year by 2020. That would be equivalent to
taking nearly three million cars off the road and would have a positive effect
on the environment. That would definitely be a better trade.
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