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NRG Energy (NRG)
NRG Energy Looking to Bag Calpine But Can It?
NRG Energy is taking the most direct route possible in order to double its production capacity - its looking to buy a major competitor. The New Jersey based company, which is one of the largest producers of electricity, made an unsolicited bid last week for Calpine Corp., another major player in the space. The proposed transaction would see NRG offer 0.534 share in it for each Calpine share. It's an all-stock transaction which values Calpine at $9.56 billion and the combined company at $22 billion. The combined entity would become the largest independent power generator in the country. So the next question becomes is Calpine willing to play ball?
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This is a pretty bold move for NRG as it is attempting to buy a company almost as big as itself; the market cap for both companies is around $10 billion. But the rationale behind the deal is fairly solid. This is not a tech merger where the future is hazy and any technology could become obsolete any day. Far from it, electricity generation is a bread and butter business where future conditions are more predictable. Integration issues are also less complex. Scale is essential in the business and that's what NRG is trying to add by going after Calpine. By buying Calpine, NRG would roughly double its output and have 45,000 megawatts of power plants. The deal is also geographically favorable with little overlap of facilities as Calpine operates heavily in the west and southeastern markets of the country while NRG focuses on the northeast.
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There are also some other factors which make Calpine a fairly attractive takeover target. The company, which recently moved headquarters to San Diego from New Jersey, just came out of bankruptcy protection a few months. During that process it was able to eliminate a lot of its debt and restructure operations to remove excess flab. Calpine's power plants, for the most part, run on natural gas, which produces about half the amount of carbon dioxide that coal-based plants generate. This makes Calpine's plants environmentally favorable which means the company has to buy a lower number of pollution allowances. And there is also the roughly $5 billion dollar in operating losses that Calpine racked up in the earlier part of the decade, which NRG could use to decrease its tax liabilities.
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So is NRG going to get the deal done soon? Probably not. Unsolicited offers happen for a reason. Usually, it means that first, a friendly offer was made to the target company which politely declined. That could very well have happened in this case too, especially given the fact that this offer was made public by a major shareholder in Calpine, Harbinger Capital Partners Fund and not by Calpine itself. This means Calpine's board is being pressured to consider the NRG offer and is not overly enthusiastic at the idea of joining forces. Calpine's board could be thinking that the company's stock, which just started trading again in Feb (after the chapter 11 stint), has been performing well in a down market (it was up about 20% even before the bid was made) and NRG is trying to buy it on the cheap well-before the peak. Calpine is attractive to a number of companies for the reasons listed above and therefore, a bidding war may be in the offing. That means NRG has its work cut out to get a deal done.
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