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Big business deals do not often come with a
promise to cut greenhouse gases. But that was
part of a deal this week for TXU, the biggest
electric company in Texas. Its board of
directors agreed to a buyout offer led by two
private equity groups, Kohlberg Kravis Roberts
and Texas Pacific.
They are offering to buy all shares in TXU and
take the company private. That means it would
stop trading on a public stock exchange.
A leverage buyout depends heavily on borrowed
money, often for the purpose of selling the
company later. This leveraged buyout would be
the biggest yet -- an estimated value of around
forty-five billion dollars, including debt.
KKR and Texas Pacific Group would take
responsibility for more than twelve billion
dollars owed by TXU. They would add twenty-four
billion dollars in new debt through borrowing to
finance the sale.
The proposal calls for them to each pay two
billion dollars in cash. Investment banks would
provide an additional three billion. And banks
would also provide a one billion dollar
unsecured loan known as an "equity bridge."
One of the unusual things about this proposal is
that utilities are not a traditional target of
leveraged buyouts. Utilities provide public
services like power and water.
TXU just reported two and one-half billion
dollars in profits last year, up fifty percent
from the year before. But utilities often have a
lot of debt because of high operating costs. At
the same time, states may limit rates if prices
rise too high.
Most unusual about the deal, however, are the
promises made by KKR and Texas Pacific. These
buyout specialist groups say they will cut
electricity prices ten percent and offer "price
protection" through September of two thousand
eight.
Also, to reduce carbon emissions linked to
climate change, they promise to build fewer
power stations that burn coal than TXU had
planned. And they promise to explore greater use
of alternative and renewable fuels. Two activist
groups, Environmental Defense and the Natural
Resources Defense Council, supported the deal.
Critics, however, say TXU may be worth more than
what is being offered. Shareholders cannot vote
on the proposal before April sixteenth. For now,
the company may consider any competing offers.
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