Portfolio Review

NRG Energy (Ticker: NRG)

Exelon bids for NRG Energy

It took less than five months for NRG Energy (Ticker: NRG) to go from being the hunter to the hunted. Utility Exelon (Ticker: EXC), already the largest independent power producer in the U.S., now seeks to acquire it and become even larger. On Monday, EXC made an unsolicited $6.2 billion stock-for-stock bid, worth $26.43 a share, for NRG, which closed today at $25, up $5.67, or 29.33%. 

In May, NRG tried and failed to buy gas-fired giant Calpine in an audacious bid for dominance in wholesale power. Much has changed since then and little of it has been good for NRG, helping to slice 55% off of its value and make its assets, particularly coal and nuclear plants, ripe for the picking by less-leveraged Exelon.

But it looks unlikely that NRG’s board will roll over, despite the proposed 37% premium to Friday’s close. Unless NRG faces the same type of problems financing collateral that pushed Constellation Energy into the arms of Warren Buffett’s Berkshire Hathaway at a bargain price last month, it is better-served toughing out the nasty period that has seen weak wholesale power prices crush its margins. Future projects will be harder to finance for the junk-rated company, but this is no reason to sell.

If Exelon must mount a hostile bid, one problem it faces is that a recovery in natural gas prices this winter would embolden NRG shareholders to vote against a deal as power margins recover. This might happen months before affected states grant regulatory approval.

Another problem is that the new company would have to divest about 6% of its combined capacity in a weak market and that a change of control would force Exelon to repurchase several billion dollars of NRG’s debt. Exelon has not yet secured financing and a deal would dent its own credit rating.

Even with these headaches, Exelon reckons the all-share deal is an attractive one. NRG’s shareholders, though, would be selling out below fair value and would likely opt to stay independent.