NRG Energy Inc. management last week spurned a sweetened all-stock merger offer from Exelon Corp. but told the company that if it tries harder, it might succeed. Several financial analysts sided with NRG, which would seem to give the ball back to Exelon, even though the company said its latest offer was "final."

Exelon's offer has been extended to Aug. 21, and NRG shareholders are to meet July 21. "There still is a lot of distance to cover," NRG CEO David Crane told financial analysts last Wednesday.

"...[B]y any objective analysis, the increase in your [Exelon's] offer fails to adequately compensate NRG stockholders even for the value created by NRG since your original offer was launched..." NRG said in its latest response to Exelon. "The fact that you were able to increase your offer largely through over $200 million per year of newfound synergies identified by your consultants leaves open the possibility that, if you would properly recognize the value created by NRG itself, you would be able to increase your current 0.545 [share] offer by a substantial amount."

"Does 'no' mean 'maybe?'" mused analysts at Tudor, Pickering, Holt & Co. Securities Inc. in a note last Wednesday. "We like NRG with/without [Exelon] deal...but saga heating up."

Investors drove the value of NRG shares up 5.75% to close at $23.35 last Wednesday after the revised offer's announcement. Exelon shares were buoyed nearly 1% to close at $48.21.

Exelon's increased offer represents a value of more than $3 billion to NRG shareholders, at least by Exelon's math (see NGI, July 6). "When we first made our offer in October 2008, it represented a 37% premium to the closing price per share of NRG's common stock on Oct. 17, 2009, the last trading day before we made our proposal public," Exelon said in conjunction with its last offer. "Before we made our offer in October, NRG's stock performance closely followed the performance of its peer group of independent power producers. From Oct. 17, 2008 through June 26, 2009, every one of these companies had decreased in value except for NRG, which was up over 20%. Clearly, our offer is supporting NRG's current stock price at a level higher than the price would be in the absence of our offer. We have increased our offer by over 12% and we believe our offer now represents at least a 44% premium for NRG shareholders."

But that's not good enough, and not quite accurate, according to NRG. Crane told financial analysts during a conference call that the actual premium to NRG's share price offered by Exelon is "a far more pedestrian 7.9%" when the offer is weighed against NRG's performance rather than the performance of its peer group. In arguing for a better price, NRG pointed to its recent acquisition of Reliant Energy's retail business, which it says is worth $4.50/share but Exelon values at only $1/share.

"When we see a $1/share for Reliant retail, there's just not a lot there to get you excited that there's going to be a dialogue between two reasonable parties trying to reach a win-win situation for shareholders," Crane said.

"The robust countercyclical earnings power of Reliant's retail franchise is just one of several reasons why the Reliant acquisition is worth significantly more than $1 per NRG share," the company said. "We are confident, based solely on the earnings guidance released today, that Exelon's economists will see it the same way."

Crane also questioned Exelon's tally of potential synergy cost savings. In corporate/information technology as well as trading, he said the amount of available savings claimed by Exelon exceeds NRG's total spending in these areas. He did not say Exelon's touted savings wouldn't be attainable, just that "we have some reason to be skeptical."

Also, Crane said NRG wants more of whatever savings would be realized, 50% to be exact. Equal sharing of synergy savings in a further revised deal could put another $3.50/share on the plate of NRG shareholders, he claimed.

Exelon NRG Energy are both merchant power animals. But one has spots and the other stripes, and combining the two through a merger might not be the best idea, especially if would-be acquirer Exelon doesn't come up with a better offer, according to an analysis by proxy advisory firm PROXY Governance Inc. (PGI).

"Though both companies compete in the same economic sector, they operate -- as their risk tolerances make clear -- on completely different business models," said PGI analysts in a note in which they recommend that NRG shareholders reject Exelon's proposed slate of directors and reelect the incumbent nominees. PGI also found a consensus among several financial analysts that Exelon's revised offer still isn't enough for NRG.

Exelon has made the case that as the nation's largest and most efficient operator of nuclear power plants it is well positioned for future restrictions on carbon dioxide emissions by power generators. Exelon plans to grow nuclear capacity through uprates, which is less risky than building new reactors as such projects often experience cost overruns, as Moody's Investors Service recently noted.

"From that very risk-averse perspective, the growth initiatives at NRG are perhaps correctly valued approximately at zero: these are not initiatives Exelon would likely pursue, and might never see the light of day in a combined entity," PGI analysts wrote.

NRG has a large coal-fired generating fleet to which Exelon ascribes little value. With partners, NRG is pursuing new nuclear facilities in Texas, known as its South Texas Project. This project has been short-listed for U.S. Department of Energy loan guarantees.

" a prime example of what deregulation intended to produce by creating a market for IPPs [independent power producers]: a more aggressive, less risk-averse response to the technological, financial and market challenges that define the industry's future," PGI said. "In NRG's strategies over the past five years one sees an acute awareness of opportunity and a deep understanding of how and where to hedge various risks."

PGI noted that NRG has trimmed its risks related to the South Texas project by partnering with others and choosing a proven nuclear technology, as well as striking fixed-price construction deals.

NRG shareholders opting to merge with Exelon would be choosing a larger, more risk-averse company but would potentially be giving up on future growth.

"...[W]hile it is clear that forthcoming carbon legislation will be less beneficial to NRG, with a significant carbon footprint, than Exelon, with the least carbon-intensive footprint among major producers, it is by no means obvious that the best solution is to average the two out through a merger, rather than pursue NRG's longer-range strategy of transforming its fleet to reduce its carbon exposure," PGI said.

Although Exelon has maintained that the NRG directors that keep spurning its offers are "entrenched," PGI said that is not the case. "...[T]he company's management and board are open to strategic discussions which might maximize shareholder value..."

Last week NRG also provided a performance update, noting that under normal circumstances such an update would wait in order to accompany second quarter results. NRG revised its 2009 guidance to reflect market conditions and include Reliant Energy's retail business. A $325 million increase in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) guidance to $2.5 billion was driven mainly by Reliant's adjusted EBITDA, which, in the first two months of NRG ownership, was approximately $200 million and is expected to contribute more than $400 million for the year. Liquidity as of June 30 was more than $4 billion, approximately $1 billion more than March 31, NRG said.

The NRG board approved an increase in authorized common share repurchases from $330 million to $500 million. NRG said it intends to resume share repurchases later this year and will seek to complete the $500 million in buybacks by the end of 2009.

"NRG's hedged baseload portfolio has largely insulated our financial results from lower power prices, lower generation and reduced demand caused by the economic recession," Crane said. "Reliant Energy's performance is exceeding our initial expectations to the point where we expect Reliant's EBITDA generation for our eight months of ownership in 2009 is greater than the acquisition price paid a couple of months ago, providing a quick payback and fueling our ability to return capital to our shareholders."

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