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Finding More Synergies, Exelon Raises Offer for NRG

Exelon Corp. increased its all-stock offer for NRG Energy by 12.4% last Thursday, upping its bid to a fixed exchange ratio of 0.545 of Exelon common stock for each NRG share from the previously offered ratio of 0.485. The deal is now worth about $7.75 billion. The richer offer comes after Exelon dug deeper to find cost synergies, including in the Reliant Energy retail business, which NRG recently acquired.

"We listened to NRG investors and balanced their views with the best interests of Exelon shareholders. An exhaustive analysis by our internal team, informed by the best third-party experts, resulted in additional synergies, allowing us to increase our offer to NRG shareholders," said Exelon CEO John Rowe. "Our track record of the Unicom-PECO merger, cost-cutting initiatives and fleet optimization proves we can deliver this further value to Exelon and NRG shareholders. This is our best and final offer, and we will use the time leading up to the NRG annual meeting on July 21 to communicate the value of our new offer to NRG shareholders, encouraging them to vote for nine new independent directors who can unlock that value."

NRG management said last Thursday it had not yet reviewed the revised offer and advised shareholders to sit tight until the NRG board reviewed the offer.

Rowe told financial analysts the deal offers NRG shareholders $1 billion to $3 billion in value and Exelon shareholders $2 billion to $3 billion in value under a wide range of scenarios. "This has been a long eight months so far. I expect we'll have a very interesting month ahead of us," Rowe said of the ongoing pursuit of NRG.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. noted that the revised offer reflects a 7.9% premium over NRG's closing price last Wednesday but said it "may be [a] case of too little, too late...We don't think the small premium gets the deal to the finish line."

NRG shares closed at $26.05 last Wednesday while Exelon closed at $51.56 prior to announcement of the revised offer. Last Thursday, following the announcement, NRG shares plummeted 5.6% to close at $24.59 while Exelon closed down about 4.91% at $49.03.

Exelon itself is the product of a merger in 2000 of PECO Energy and Unicom Corp. of Chicago, parent of Commonwealth Edison (see NGI, April 17, 2000). Exelon began its pursuit of NRG last year and has been repeatedly spurned by the company's management (see NGI, June 29; Nov. 17, 2008).

Also last Thursday Exelon filed with the Securities and Exchange Commission an investor presentation that will be used as part of the company's proxy solicitation for the election of its slate of directors. In the presentation, Exelon cited approximately $1.5 billion of additional newly identified synergies as the primary reason for the increase. The new offer also reflects the value of NRG's recent acquisition of the Reliant Energy retail business (see NGI, March 9). Rowe said Exelon assigned a value to the Reliant retail operation of about $1/share. "We think that NRG made a good buy on Reliant. We think it adds a little value," he said.

The company's more detailed analysis of NRG's structure, cost platform and operations assumes that the company would not only absorb NRG but also integrate and transform it. This approach, plant benchmarking, and application of Exelon's management model to NRG's assets yielded an estimated present value of $3.6 billion to $4 billion in operational synergies from areas including corporate/information technology, fossil and nuclear fleet, trading, development and retail operations. It reflects a 30% reduction in NRG's operating and maintenance expense, which is consistent with prior power sector transactions, Exelon said.

Based on discussions with its outside advisers, Exelon said it is confident that it will be able to meet all financing needs associated with the transaction, including the refinancing of $4.7 billion of NRG senior notes and other NRG debt, if necessary, while maintaining investment grade credit ratings. This would be accomplished, in part, by asset sales.

Moody's Investors Service said that should the deal go through, multiple-notch ratings changes are possible at both Exelon and NRG. Moody's analyst A.J. Sabatelle said Exelon "should be able to maintain an investment-grade profile at the parent and at each of its subsidiaries."

Last month Exelon announced a management realignment and the shedding of about 500 jobs in order to cut costs.

NRG shareholders would benefit from Exelon's stronger investment grade balance sheet, low-carbon nuclear fleet, operating excellence and a $600 million share in the synergies resulting from the combination, Exelon said. Exelon shareholders benefit from NRG's assets, cash flow, and its own share of the synergies, the company said.

"Together, the two companies would become the first national generation company," said Rowe. "There is no model that can do more for shareholders of both companies than an Exelon-NRG combination."

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