Spurned but not passive, Atlanta-based Mirant Corp. Wednesday sued NRG Energy, Inc., the company it covets, for rejecting what is being described as an $8 billion takeover bid.
The legal action asks a Delaware court to order the Princeton, NJ-based merchant power plant operator not to try to block Mirant’s acquisition attempt, alleging that NRG is using a “transaction ploy” to reject the offer by claiming that confidential information has been used from a former NRG financial adviser.
Mirant told the Associated Press (AP) it has not received any confidential information, and NRG responded to the news wire service 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 this month.
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 mentions Goldman Sachs, which AP reported was involved in Mirant’s three-year Chapter 11 bankruptcy that ended last January. The legal action follows by a day Mirant making public its bid for NRG.
With $11.5 billion of financing in hand, Mirant a day earlier announced that it was offering what it considered a 33% premium for NRG Energy Inc. 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.”
NRG confirmed it had received a merger offer from Mirant, and the NRG board considered and rejected the proposal. 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 Tuesday (May 30). The offer is part of many months of maneuvering between the two companies.
A coupling of the two would form one of the largest power producers in the United States. 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.
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.”
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 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.”
“Having spent considerable time analyzing Mirant, its assets and prospects — both during the three years you spent in bankruptcy and the four months since you emerged — we have concluded that Mirant is a company and stock with flat earnings, little to no growth opportunity beyond 2007, substantial and imminent environmental capital expenditures, and significant EBITDA [earnings before interest, taxes, depreciation and amortization] exposure to developing country risk,” NRG’s two top officers said in their letter.
To the contrary, Muller in his Tuesday letter said Mirant has sufficient projected cash flow to cover environmental capital investments through 2011.
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