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Wall Street Steps into Wake of Spurned Mirant Bid for NRG

If Wall Street's reaction prevails, Princeton, NJ-based NRG Energy Inc.'s stiff arming of an unsolicited offer from fellow merchant power operator Atlanta-based Mirant Corp. should hold up. Whether Mirant drops the offer voluntarily as several Wall Street private equity hedge funds were suggesting late last week was still unclear.

Standard & Poor's Ratings Services said Friday that in the long term a combination of the two companies, which it currently rates similarly (B+, Stable outlook), would be "unlikely" to change S&P's long-term ratings and outlook for the new company. In the short term, however, the specter of the outstanding, unsolicited offer caused the rating agency to assign NRG a "CreditWatch with negative implications."

With $11.5 billion of financing in hand, Mirant announced last Tuesday that it was offering what it considered a 33% premium for NRG with a cash and stock offer equivalent to $57.16/share. NRG quickly issued a statement saying it had rejected what it called the "wrong deal, at the wrong time," confirming in its own announcement that it had received a merger offer from Mirant earlier in May, and the NRG board considered and rejected the proposal. Mirant subsequently filed a lawsuit to stop NRG from blocking the deal.

It was NRG's opinion that no action by the company's shareholders is necessary. Mirant's formal offer came in letters on May 10 and again on May 30. The offer is part of many months of maneuvering between the two companies, which if combined would constitute the second largest power generator in the nation with substantial capacity throughout the country, particularly in the Northeast and Texas.

NRG promotes itself as a truly diversified merchant power generator in terms of fuel and geography with the bulk of its 59 power plants, totaling about 25,000 MW, concentrated in four major areas of the United States -- Northeast, South, Texas and the West. The company also has assets in Australia, Europe and South America. Mirant has 24 U.S. power plants and a related commercial business to support the plants with risk management, marketing and trading. It also has power generation and related activities overseas in the Caribbean and the Philippines. Worldwide, the company's portfolio totals 17,300 MW.

One of Mirant Corp.'s largest shareholders and a creditor in its three-year Chapter 11 bankruptcy process last Thursday asked the company to drop its attempt at a hostile takeover of NRG Energy and instead put the company up for sale. Connecticut-based Pirate Capital LLC, the portfolio manager of the investment fund, wrote to Mirant's CEO and directors, saying investors are "concerned" about the offer to buy NRG.

Others on Wall Street echoed similar sentiment, such as another large shareholder, the Jana Partners fund, and Prudential Equity, accusing the Mirant board of pursuing an acquisition that would "destroy shareholder value" by trying to buy NRG at considerably under its per-share value as viewed by the private capital investment sector.

Separately, Goldman Sachs Group Inc. resigned from the role it was supposed to play in advising Mirant in the unsolicited $7.8 billion bid for NRG, after NRG accused Goldman of providing Mirant with confidential information on the Princeton, NJ-based merchant generator's Texas power plant hedging programs.

"We do not believe that entering into a hostile bidding war for NRG is in the best interest of Mirant shareholders," wrote Thomas Hudson Jr., Pirate Capital's manager in a letter to Edward Muller, Mirant's CEO that was also sent to the company's board of directors and filed with the Securities and Exchange Commission (SEC). "While we believe that consolidation in the power sector is necessary, we question whether Mirant should be a consolidator."

Funds managed by Pirate Capital collectively hold almost five million shares of Mirant stock, or 1.6% of the company, the firm's SEC filing indicated.

The accusations between NRG and Mirant surfaced as part of the lawsuit Mirant filed in the wake of the rejection of its unsolicited offer. The legal action asked a Delaware court to order NRG not to try to block Mirant's acquisition attempt, alleging that NRG is using a "transaction ploy" to reject the offer by claiming confidential information has been used from a former NRG financial adviser.

Mirant denied having received any confidential information, and NRG responded that the lawsuit is "a desperate attempt to compensate for the fact that Mirant's proposal significantly undervalues NRG," a claim the latter company made in a rejection letter to Mirant earlier in May and Wall Street financiers agreed was the case.

The lawsuit was brought in the Chancery Court of Delaware, but did not name the alleged financial adviser, although NRG's May 23 rejection letter clearly mentioned Goldman Sachs, which was involved in Mirant's three-year Chapter 11 bankruptcy that ended last January. The legal action followed by a day Mirant making public its bid for NRG.

A NRG spokesperson on Friday said the company continued to be "very concerned about any access to NRG's material, confidential information that Mirant may have had, and any potential misuse of that information in Mirant's preparation of its unsolicited, hostile proposal." The spokesperson reiterated NRG's contention that Mirant's lawsuit has no merit.

"Consistent with the board's fiduciary duties, NRG will continue to take all appropriate steps to protect the interest of our shareholders and NRG's confidential business sensitive information," the NRG spokesperson said.

In rejecting the overture, NRG concluded that Mirant, which recently emerged from Chapter 11 bankruptcy protection, is an energy merchant and independent power producer with little or no growth potential. In contrast, Mirant's offer letter said that when it emerged from Chapter 11 on Jan. 3 most observers characterized it as having "the strongest balance sheet in the industry," and since that time 275 million shares have traded, representing 92% of outstanding shares. In addition, Mirant CEO Edward R. Muller argued that his company's hedging strategy has been "effective in reducing risk while improving our earnings profile."

A response was sent May 23 by NRG Chairman Howard Cosgrove and CEO David Crane. In rejecting the overture, the two NRG senior executives said they felt that more consolidation in the energy utility sector was "inevitable, and we expect to participate -- either as a buyer or a seller."

NRG's letter said the board found the offer "deficient" in three areas: (1) it "significantly" undervalued NRG; (2) Mirant stock has a "relative lack of liquidity and trading history;" and (3) the transaction is untimely due to "developments in the wholesale power generation sector."

Mirant said the proposed acquisition would be "immediately accretive to the pro forma free cash flow/share of Mirant." JP Morgan Chase & Company provided the merchant energy company with $11.5 billion for the transaction, according to Mirant, which thinks the timing is right and wants to move quickly.

"Mirant continues to believe that the proposal creates significant value for the owners of both companies and has decided to make its proposal public" (in the form of distributing a copy of its board's letter to the NRG board). In that letter, Mirant's board said it was "disappointed" that NRG's directors had "so quickly" rejected the deal out of hand. "We think it is important for your shareholders to be informed of such a compelling opportunity."

NRG said it has retained Citigroup as its financial adviser on the matter, and Skadden, Arps, Slate, Meagher & Flom LLP as it legal adviser. NRG's board of directors reviewed the Mirant proposal and deemed it "not in the best interest of NRG shareholders," noting that the company will only pursue "transactions that create unquestionable value for our shareholders."

Noting Mirant's strong first quarter 2006 financial results ($467 million net income versus $11 million for the same period in 2005), Pirate Capital's Hudson said his investors believe "shareholders would be substantially rewarded if Mirant put itself up for sale." He went on to "strongly urge" Mirant to retain a financial advisor to begin a process of selling itself, and Pirate Capital requested a meeting with the company's board to discuss the matter further.

In reporting on Goldman Sachs leaving Mirant, the Wall Street Journal said that the dispute between Mirant and NRG, two merchant electric power producers, "highlights the uncertain ethical boundaries" that Wall Street deal-makers must attempt to tiptoe around.

"For Goldman, these issues are especially sensitive, given that it is working so many angles in today's deal-making environment," the Journal report said.

The Wall Street Journal's report Thursday cited "people familiar with the matter" as verifying that some of the same Goldman Sachs people advising Mirant had worked for NRG or its subsidiaries, and that last year Goldman had been involved in the $5.8 billion sale of the Texas Genco power plant group to NRG, and Goldman later played a "junior underwriting role" in NRG's financing of the deal.

Part of the information in the deal that could have been advantageous to prospective bidders for NRG was the amount and detail of financial hedges Texas Genco had in place, according to the Journal report.

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