If NRG Energy Inc. (NYSE: NRG) were an athletic prospect, scouts would rate it as a “triple threat.” That’s because the Princeton-based wholesale power generator is involved in all three of the key energy sources of the future: Solar, wind and nuclear.

And that’s only part of the reason I like this stock.

Growing profit margins and earnings momentum add to the energy company’s appeal – and a rebound in U.S. economic activity hasn’t even begun in full.

When NRG announced its second-quarter results a few weeks ago, the company said that its profits tripled from a year ago – eclipsing Wall Street estimates and setting a new record. It also boosted its earnings guidance for all of 2009, and increased its stock-buyback target from its previous $330 million worth of its shares to $500 million.

Income from continuing operations was $432 million – a marked improvement over last year’s $41 million loss.  And its recent acquisition of the Texas retail-energy business of Reliant Energy Inc. [now RRI Energy Inc. (NYSE: RRI)] is starting to pay off.

In two months the tie-up has already delivered $200 million of the planned $400 million in adjusted earnings before income taxes, depreciation and amortization (essentially a cash-flow metric that professional investors refer to as “EBITDA”) gains for the year.  With disciplined management this acquisition should outperform its estimated gains.  This analysis is being recognized as we speak by the market, with unusual January call option activity in RRI stock last Friday.

NRG has interest in 44 power plants with 24,005 megawatts (MW) net ownership, most of which is in the United States. Plants in Texas and the Northeast account for almost 18,000 MW, giving the company positioning in fairly strong markets where environmental, but NRG also has operations in Australia and Germany.

The company distinguishes itself by having operating margins that are roughly double that of its peers – the product of its efficient fleet composition and prudent active energy price hedging policies. The hedges NRG currently has in place are likely to outperform analysts’ estimates, as well. That’s because no analyst wants to be caught over-estimating upside, especially in volatile markets like energy futures. So, Wall Street consistently undervalues the expected value of these hedges, which the firm carries on a mark-to-market basis. That was the case in the second quarter.

With respect to the economy, industrial sector inventories are very low, meaning they will need to be replenished in the third quarter.  The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” gave a nice boost to industrial production, and some signs of stability and even some gains – let’s cross our fingers –can be seen in some areas of the housing market.

We’re by no means out of the woods, yet, but U.S. gross domestic product (GDP) did better than expected in the last quarter – shrinking by just 1% – and is likely to beat analysts’ expectations in the third quarter as well. That’s good news for NRG because the third quarter is traditionally the most profitable quarter of the year for utilities. Prices should firm up, benefiting this company’s already stellar return on investment (ROI).

And in addition to being well positioned to profit in the short-term, NRG is an outstanding long-term play because it’s ready to capitalize on the next stage of “green” energy development: low carbon emissions. After all, green is the color of money.

The company’s natural-gas, new and existing commercial nuclear, and new and very large wind-and-solar-power projects are sure to benefit longer term from the move towards environmentally-friendly forms of energy generation.

With total liquidity of $4 billion, NRG is in an impeccable position to develop its planned projects and take advantage of small opportunistic acquisitions, should they appear.  The company has a very prudently managed balance sheet and a shrewd growth management discipline, which is an invaluable attribute in adverse economic conditions where cash is king.

And let’s say that all of these advantages that we have outlined here have not gone unnoticed by the competition:  Two companies in the last three years have attempted to acquire NRG.  Most recently, Exelon Corp. (NYSE: EXC) attempted to buy NRG outright. And even when the takeover attempt was rebuffed, NRG stock did not suffer. Exelon has since backed off from its acquisition attempt.  That stock-price stability reflects strong investor confidence in management’s execution.

At Friday’s closing price of $27.50, NRG’s stock was still down about 30% from its 52-week high of $39.09 – just one of several reasons it still has room to rise, even after a scorching 91% run from its 52-week low of $14.39.

The stock is trading at a low 10 times forward earnings, has been consistently above its 200-day moving average since mid-July and is oversold by many proprietary measures.  This stock could be ripe for a strong upward move as we approach the end of the year.  What’s more important is that the intrinsic long-term value of the company is undervalued at these prices.

Recommendation:  Buy NRG Energy Inc. (NYSE: NRG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in NRG Energy Inc.

Source:Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-why-nrg-energy-inc-nyse-nrg-is-the-energy-sector%e2%80%99s-%e2%80%9ctriple-threat%e2%80%9d-profit-play/20238/feed 1 http://www.contrarianprofits.com/articles/why-you-should-buy-these-5-dirt-cheap-buffet-stocks-now/16567 http://www.contrarianprofits.com/articles/why-you-should-buy-these-5-dirt-cheap-buffet-stocks-now/16567#comments Tue, 12 May 2009 20:39:30 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=16567 SmartMoney.com associate editor Jack Hough says now is a good time to pick up Buffett-favored stocks on the cheap.

“I’m more interested in exploiting Buffett than defending him,” Hough writes. “The shortest path to being a great investor is to copy one.”

He recommends against Berkshire shares because of its concentration in financial service companies. “Investors who prefer to avoid that can simply cherry-pick from its holdings, which are reported quarterly.”

Hough chose five stocks that “Buffett says he still likes but that Berkshire has trimmed its stake in to make room for new purchases.”

The selections: Burlington Northern (NYSE:BNI); Eaton (NYSE:ETN), an industrial products company; ConocoPhillips (NYSE:COP); Kraft (NYSE:KFT); and NRG Energy (NYSE:NRG), a utility.

For those rooting for a revival of buyout activity, the merger of the two companies shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.

But as Money Morning reported recently as part of its ongoing “Outlook 2009” economic forecasting series, the credit crisis has put the mergers-and-acquisitions (M&A) market into a deep freeze.  And not even the marriage of these two U.S. pharmaceutical giants will be enough to thaw out the deal-making market anytime soon.

Both the size of the deal and the players involved represent a unique combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate.

Pfizer, a company with strong cash flow and lots of cash on its balance sheet, did get $22.5 billion in financing for the Wyeth buyout, but others are unlikely to get the same terms. The drug company has a rare, stellar “AAA” credit rating from Standard & Poor’s Inc.

Furthermore, lenders are “favoring sectors where there is the most stability” in earnings and revenue outlooks, like health-care stocks as well as certain education and technology firms, Howard Lanser, an investment banker at R.W. Baird, told BusinessWeek.

Other sectors such as retail are currently out of favor and likely to stay that way, he said.

That makes a return to the heady days of the mid 2000s – when bountiful M&A activity lined the pockets of Wall Street investment bankers – an unlikely pipe dream.

The volume of global mergers and acquisitions could fall about 35% in 2009 from an expected volume of $3.1 trillion in 2008, investment bankers say. That would be less than half of last year’s record $4.4 trillion in deals.

“There are substantial headwinds facing M&A and the headwinds are not subsiding,” Cary Kochman, co-head for Mergers and Acquisitions for the Americas at UBS AG (UBS), told the Reuters.

The No. 1 issue is the lack of available credit. Banks and other lenders have pulled back from financing deals, making loans, especially for big deals, scarce and more expensive.

“You are less likely to see deal sizes beyond the $20 billion mark in 2009,” said Larry Slaughter, co-head of European M&A for JPMorgan Chase & Co (JPM). “The balance-sheet capacity of the banking system will make it tough to finance much-bigger transactions.”

And fear is playing a close second fiddle to financing as a barrier to any revival of M&A activity.  Most firms are holding onto any cash they have as insurance against a prolonged economic downturn.

“It takes a little courage to step forward and pursue M&A in this environment,” Lanser says. “To spend that cash can be a big psychological hurdle.”

Private Equity & Hedge Funds No Help

Even the so-called “masters of the M&A universe” – the leveraged buyout firms – are unlikely to ride to the rescue this time.

The Blackstone Group LP (BX), the No. 1 leveraged-buyout firm is staying on the sidelines searching for profits by advising companies in restructuring distressed debt.

The company that orchestrated a then record $34 billion acquisition of Equity Office Properties Trust in 2007 is playing a more modest role working consulting with AIG (AIG), as it sheds units worth about $60 billion to repay the government after its bailout last year.

Bankruptcies at investment banking’s most-hallowed companies like Bear Stearns and Lehman Bros Holdings Inc. (LEHMQ) obliterated the global financial system after buyout firms helped inflate the credit bubble.  Now the private equity and hedge funds may be next to go, as LBO deal making enters the gravest crisis in its 40-year history.

Buyout firms such as KKR & Co. (KKR) and the Carlyle Group went on a record-breaking shopping spree in 2006-07, saddling themselves with $1.5 trillion in assets that they intended to sell for a profit. Since then, they haven’t been able to find buyers so they can reap the 20% profits they get for such deals.

“This is part of the biggest bubble to burst in our history.” Roy Smith, a former Goldman, Sachs & Co. (GS) partner told Bloomberg News. As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report by Boston Consulting Group Inc.

“These guys had a sense they could do no wrong,” Paul Schaye, managing partner of New York-based Chestnut Hill Partners, told Bloomberg.. “ Now they’re going through a very sobering experience. They have to figure out how to survive this environment.”

So what will persuade dealmakers to take on added risk in such a gloomy environment? Turns out the the very things preventing consolidation now – the recession and credit crunch – could spark the revival Wall Street craves.

Only the Fit Survive

“There is going to be a need for a lot of companies to consolidate to survive,” Mark DeGennaro, managing director at investment bank Gruppo, Levey & Co. told Bloomberg. Firms with falling sales figures and credit trouble may have no choice but to find buyers – often at very low prices, he said.

Corporations with cash on their balance sheets or stronger share prices have been taking advantage of the drop in equity valuations among their rivals to do deals.

In fact, 2008 was marked by a jump in hostile or unsolicited deal activity, including InBev’s (ABI) planned acquisition of Anheuser-Busch Cos. Inc. (BUD) and Exelon Corp.’s (EXC) bid for NRG Energy Inc. (NRG).

And despite the obvious risks, some private equity firms will still dip their toes in the LBO waters.

“The best returns in private equity have come in a period like the one we’re just entering,” Blackstone founder Stephen A. Schwarzman said in a speech to investors and buyout firms in Dubai in October. “This is an absolute wonderful time.”

Another traditional provider of capital – sovereign wealth funds – may also step up to the plate.

“Even though the price of oil is volatile, they have substantial amounts of money…they need to get to work and generate a reasonable rate of return,” Alan Alpert Senior Partner of M&A Transaction Services at Deloitte Touche Tohmatsu told Boardmember.com. “I think you’ll see sovereign wealth funds come back into the U.S. market and make investments.”

Source: The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market

And the “Oracle of Omaha” isn’t done, yet.

Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) agreed to buy $5 billion in perpetual preferred Goldman shares that pay 10% interest. In addition, Berkshire receives warrants giving it the right to buy $5 billion worth of Goldman’s common shares at any time over the next five years at a price of $115 per share. The shares closed Tuesday at $125.05 and yesterday (Wednesday) at $133, up $7.95, or 6.36%, each.

“Goldman Sachs is an exceptional institution,” Buffett said in a statement. “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Based on Tuesday’s closing price of $125.05, Buffett made an almost instantaneous paper profit of about $437 million on the warrants. With yesterday’s advance, that paper profit rose to $783 million.

Scott Roth, management partner at Severn River Capital Management, told Bloomberg News that by his calculations Buffett is buying the preferred stock for about $3.2 billion, after accounting for the warrants. Roth worked at Goldman more than a decade ago and is betting the stock won’t drop.

“As usual Mr. Buffett has struck an extremely attractive deal,” Guy Moszkowski, an analyst at Merrill Lynch & Co. Inc. (MER), wrote in a note to clients. “He is, we believe, getting a better deal than he did in 1987 when he bought a Salomon Bros. convertible with a 9% yield, for a company that is considerably more attractive than the ‘87 Salomon.”

Goldman Sachs, which has booked roughly $5 billion in losses and write-downs, and which has lost about 40% of its market value this year, is benefiting, too. In addition to Berkshire’s cash infusion, the firm gets a vote of confidence from Wall Street’s greatest legend at a time of extreme uncertainty.

The collapse of The Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. (OTC: LEHMQ), and the hurried sale of Merrill Lynch to Bank of America Corp. (BAC), sent shockwaves through the industry. And many investors, up until this point, were unsure of just how successful Goldman’s transition to a holding company would be.

Buffett is “getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren’s stature,” Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares, told Bloomberg.

Goldman got an immediate lift in its share price, which rose 4% over the past two days, as investors and mutual funds mimicked Buffett’s strategy.

Buffet also gave a boost to the overall market, as he braved the treacherous terrain of financials.

The purchase “is a significant sign, as Mr. Buffett is of course known for making prudent, long-term investments in companies with good fundamentals and solid growth potential,” Sacha Tihanyi, a currency strategist at Scotia Capital told The Wall Street Journal. “The ‘Oracle of Omaha’ believes not only in Goldman, but also the industry’s prospects over the medium term.”

Jim Cramer Backs Buffett

In an article that appeared on the TheStreet.com, site director and co-founder Jim Cramer broke down both Buffett’s Goldman stake, as well as his recent bid for Constellation Energy Group Inc. (CEG).

“These investments are the first sign that someone, some grown-up, is coming in from the sidelines, not because he has been talked into something that he doesn’t want to do or understand – which has been the case in all of the other bank financings – but because he sees a delicious rate of return that will be hard to take away now that he has put his balance sheet to work, one of the last with any firepower to make a difference,” said Cramer.

Earlier this month Buffett’s MidAmerican Energy Holding Co. offered $4.7 billion, or $26.50 a share for Constellation. MidAmerican displaced Electricite de France SA (PINK: ECIFF), Europe’s biggest power producer as Constellation’s top shareholder Monday, after paying $1 billion in cash for a 19.9% stake.

Both Goldman and Constellation fit into the typical Buffett model of having strong management and well-established business models. But they’re facing problems that have transformed them into bargain-basement profit plays.

“It is more than ironic that [Buffett] came in after a multitude of articles that talked about how Goldman is worth far less than it was before it became a commercial bank, because the truth is that it is worth far more as a commercial bank because it can do more and have access to more capital and is safer,” Cramer said. “The press didn’t believe it because the press gets its information from the [short-sellers]. But Buffett did. Perhaps we should be thinking more like Buffett and less like the press.”

What Buffett’s Been Buying

According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor’s 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.

That means it’s well worth the time to revisit what Warren’s been up to.

In February, Berkshire took an 8.6% stake in Kraft Foods Inc. (KFT), becoming the foodmaker’s biggest shareholder. That was followed in March by the $4.5 billion purchase of Marmon Holdings Inc. In April, Buffett supplied Mars Inc. with $6.5 billion to help the candy company acquire Wrigley Jr. Co.

Last month, filings with the U.S. Securities Exchange Commission (SEC) shed more light on just what Berkshire was up to during the second quarter.

Prior to putting $3 Billion into Dow Chemical Co.’s (DOW) $15.4 billion takeover of Rohm & Haas Co. in July, Berkshire reduced its investments in Anheuser Busch Cos. (BUD) and Trane Inc., and added positions in NRG Energy Inc. (NRG), Ingersoll-Rand Co. Ltd (IR), and Sanofi-Aventis (ADR: SNY).

According to the SEC, Berkshire in June reduced its stake in Anheuser Busch to 13.85 million shares, less than half the 35.56 million shares it held as of March 31. Also in March, Berkshire dumped its 10.9 million shares of Trane Inc. That stake was valued at more than $500 million as of March 31.

After unloading in the spring, Buffett treated Berkshire Hathaway to a $4 billion shopping spree. By the end of the second quarter, Berkshire’s stake in French drugmaker Sanofi Aventis had shot up by 317,200 shares, to reach 3.9 million. Berkshire also added 5 million shares of Ingersoll-Rand, and announced new holdings in NRG Energy, the second-biggest power producer in Texas. Berkshire held 3.24 million NRG shares as of June 30.

Then, in a move that highlighted Buffett’s bullishness on railroad stocks, Berkshire doubled its stake in Union Pacific Corp. (UNP), taking its holdings from 4.45 million shares at the end of March to 8.91 million shares as of June 30.

But the acquisitions disclosed to the SEC were only a fraction of the $3.98 billion Berkshire spent on stocks in the April-June period.

Even if Buffett bought the shares at their highest second-quarter prices, which he almost certainly did not, the total cost would only have been about $260 million. That means more than $3.5 billion went into smaller amounts of unnamed stocks the company was not required to disclose.

At the year’s mid-point, Berkshire had $31.2 billion in cash, down from $44.3 billion at the end of 2007, Bloomberg News reported.

“It’s nice to have a lot of money, but you know, you don’t want to keep it around forever,” Buffett recently told Bloomberg. “I prefer buying things. Otherwise, it’s a little like saving sex for your old age.”

Source: Buffett’s Goldman Deal Has Big Benefits, but What Else is Berkshire Up To?

Not even Warren Buffett was immune to the stock market’s rampant first-half gyrations, as Berkshire Hathaway Inc. notched its worst first half in 18 years, with the shares skidding more than 16%. But only a fool would count out the great Oracle of Omaha, who has spent the past several months restructuring his company’s portfolio and is now ready to come out swinging for the year’s second half.

As Money Morning’s Horacio Marquez noted in his most recent “Buy, Sell, or Hold” feature, Berkshire Hathaway has had a tough start for the year.

The company’s net earnings for the first half were $3.8 billion – a 33% decline from the $5.7 billion reported for the same period last year. But even though the second quarter was weak – especially by Buffett’s standards – it showed marked improvement from the first three months of the year.

Berkshire reported about $1.6 billion in unrealized losses from derivatives in the first quarter. But after warning that derivatives contracts will often “swing wildly,” the company posted $689 million in derivatives gains in the second quarter.

Berkshire’s revenue actually rose 10% to $30.09 billion for the quarter.

But that’s not enough for Buffett, who has set about restructuring his company’s holdings. In the past few months, Berkshire has reduced its investments in Anheuser Busch Cos. (NYSE:BUD) and Trane Inc., and added positions in NRG Energy Inc. (NYSE:NRG), Ingersoll-Rand Co. Ltd (NYSE:IR), and Sanofi-Aventis (ADR:SNY).

According to filings with the U.S. Securities Exchange Commission (SEC), Berkshire in June reduced its stake in Anheuser Busch to 13.85 million shares, less than half the 35.56 million shares it held as of March 31. It’s likely the company received a tidy sum for its shares, as earlier that month InBev SA (PINK: INBVF) offered $65 a share for the American icon. Buffett admits to bailing on the Bud brand before InBev raised its offer to $70 a share, but AB was trading at close to $62 a share on June 30, much higher than the $47 a share the company was valued at in late March.

Also in March, Berkshire dumped its 10.9 million shares of Trane Inc. That stake was valued at more than $500 million as of March 31.

After unloading in the spring, Buffett treated Berkshire Hathaway to a $4-billion shopping spree over the next several months. By the end of the second quarter, Berkshire’s stake in French drug maker Sanofi Aventis had shot up 317,200 shares to reach 3.9 million. Berkshire also added 5 million shares of Ingersoll-Rand, and announced new holdings in NRG Energy, the second-biggest power producer in Texas. Berkshire had 3.24 million NRG shares as of June 30.

Even more interesting, in a move that highlighted Buffett’s bullishness on railroad stocks, Berkshire doubled its stake in Union Pacific Corp. (NYSE:UNP), taking its holdings from 4.45 million shares at the end of March to 8.91 million shares as of June 30.

Last year, Buffett and Berkshire road the rails hard. Buffett made his first move on Burlington Northern Santa Fe Corp. (NYSE:BNI) last April, acquiring nearly 40 million shares – or close to 11% – of the railroad. He then moved on to snap up 10.5 million shares of Union Pacific Corp., and 6.4 million shares of Norfolk Southern Corp. (NYSE:NSC).

Later in August, Berkshire went shopping again, loading on an additional 3.3 million shares of Burlington and another 6,000 in September. But Buffett didn’t stop there: He added yet another 10,300 shares of Burlington over the two-week period ending Jan. 22, bringing Berkshire’s total stake in the company to 18.2%.

Berkshire’s second-quarter acquisitions, which were disclosed in an SEC filing last week, are only a fraction of the $3.98 billion Berkshire spent on stocks in the April-June period.

Even if Buffett bought the shares at their highest second-quarter prices, which he almost certainly did not, the total cost would only have been about $260 million. That means more than $3.5 billion went into smaller amounts of unnamed stocks the company was not required to disclose.

Where that money went is anybody’s guess, but Buffett indicated in a recent interview with CNBC that a portion of it went into one of two stocks: Wells Fargo & Co. (NYSE:WFC) or American Express Co. (NYSE:AXP).

Wells Fargo stock has plummeted 22% in the past year, while American Express is down more than 37% in that time. However there may be some clues as to which stock Buffett really believes will rebound in some earlier comments he made.

“We’ll say at American Express… they are experiencing credit deterioration and they’re experiencing it sort of in all segments,” Buffett said earlier on CNBC’s Squawk Box. “So they’re seeing the rich customers slow down in payments, slow down in purchases.

“And American Express can describe that rather than I,” he added, “but I pay a lot of attention to that sort of thing. And incidentally, it will get cured at some time in the future, but right now the situation is getting worse and I would say that I don’t see any early end to that.”

That assessment doesn’t seem particularly favorable, particularly compared with comments Buffett made with regards to Wells Fargo just a few months ago.

“Wells Fargo stock was down last year,” Buffett said, “I don’t think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch.”

Berkshire already owns considerable stakes in both companies.

Source: Buffett Reignites Berkshire Hathaway with a $4 Billion Spending Spree

“I don’t think anyone should be surprised by Calpine’s announcement,” Gordon Howald, an analyst with Calyon Securities USA Inc. in New York, told Bloomberg News. Howald has a “buy” rating on NRG shares, but doesn’t own any. “If they were to accept the first bid as laid out, they would probably be doing their shareholders a disservice.”

Calpine has 60 power plants capable of producing 23,000 megawatts of electricity, while NRG maintains 49 plants with a total capacity of 24,120 megawatts. A successful takeover would double NRG’s capacity in the United States to about 45,000 megawatts, enough to power 36 million homes.

Despite rejecting the initial bid, Calpine stated it is examining whether “there is a basis for discussions between the two companies to explore a business combination,” The Associated Press reported. However, the company stressed that it’s possible no deal would ultimately result from the talks.

“We respect the Calpine Board’s decision but are disappointed that they have decided not to move quickly to deliver the benefits of our proposal to Calpine’s shareholders,” David Crane, NRG’s chief executive officer, said in a statement, Bloomberg reported.

The company remains interested in the deal, Crane added.

NRG would benefit from Calpine’s strong presence in California and its focus on cleaner burning natural gas. But there could be other interested suitors.

Other power companies that could throw their hat into the ring for consideration include Constellation Energy Group Inc. (CEG), Reliant Energy Inc. (RRI) and Mirant Corp. (MIR), James Halloran of National City Corp.’s (NCC) Private Client Group in Cleveland, an analyst who helps oversee $38 billion in assets, including about 13,500 NRG shares, told Bloomberg. A less likely possibility is Dynegy Inc. (DYN), Halloran added.

“There’s going to be a lot of negotiations in this,” Halloran said. “I think you’ll get at least one or two other possible bidders on it.”

Calpine shares closed up 25 cents on Friday, an increase of 1.10%, to close at $22.94. NRG shares also gained, closing up 87 cents for the day, an increase of 2.13%, at $41.68.

Source: Calpine Rejects NRG Takeover Bid

NRG acknowledged Wednesday that it made the initial $22.98 a share offer on May 14. NRG said the deal assumes Calpine had 500 million fully diluted shares outstanding as of May 13. That calculation would value all of Calpine at $11.35 billion.

NRG offered to pay 0.534 shares for each share of Calpine, the company said in a statement. Based on NRG’s Wednesday closing price of $42.51, the deal values each Calpine share at $22.70, a 6.7% premium to Calpine’s closing price of $21.20.

“This is quite simply, the right deal, at the right point in time, between the right partners,” David Crane, NRG’s chief executive officer said in a statement.

After over-expanding during a period of high electricity prices, the company was unable to carry its heavy debt load as prices began to drop in 2002 and was forced into bankruptcy in 2005.

Calpine laid off more than 1,000 employees – a third of its workforce at the time – and restructured more than $20 billion in debt. Analysts anticipate a buyout will result in more job cuts as NRG aims to lower annual expenses by eliminating overlapping positions.

NRG spent seven months operating under Chapter 11 bankruptcy itself in 2003. NRG said that it is “becoming a full taxpayer four years out” of its own troubles, and the combined company will be able to make the best use of Calpine’s $5.1 billion of net-operating-loss carry-forwards, Dow Jones reported. While Calpine is still putting together its post-Chapter 11 team, NRG says it has strong management immediately available.

“We believe Calpine’s lack of a management team, plus NRG’s established (and in, our view, well-regarded) management team, will likely weigh heavily on Calpine’s board as it deliberates negotiations,” NRG said.

Right now, Calpine has 60 power plants capable of producing 23,000 megawatts of electricity, while NRG maintains 49 plants with a total capacity of 24,120 megawatts.

The takeover would double NRG’s capacity in the United States to about 45,000 megawatts, enough to power 36 million homes.

NRG would also benefit from Calpine’s focus on cleaner natural gas fuel, as lawmakers seek to reduce carbon-dioxide emissions. Calpine is the largest U.S. producer of electricity from gas-fired plants, Bloomberg News reported.

The Lieberman-Warner climate security act, a bill proposed by senators Joseph Lieberman and John Warner aims to reduce emissions by 66% from 2005 levels by 2050. The Senate is scheduled to begin debate on the measure next month.

Source: NRG Looks to Electrify its Business with $11.3 Billion Calpine Takover