NRG & Calpine: Insanity or Opportunistic? (NRG, CPN)

After last night’s disclosure and confirmation that NRG Energy, Inc. (NYSE: NRG) had sent a buyout offering letter to Calpine Corporation (NYSE: CPN), we wanted to let the dust settle here before calling this insane or genius. 

NRG sent a $23.00 buyout offer to Calpine back on May 14, which was a 16% premium to the day’s prior close and roughly 20% higher than the daily average.

NRG stated in its letter that this "creates a combined company the likes of which this industry has never seen: a fully capable, multi-fuel, across-the-merit order company with four highly coherent regional businesses, of at least 8 GW each, spanning all of the major competitive power generation markets in the United States. As such, we are contemplating a transaction that is transformative to our respective companies, transformative to the industry and transformative to our respective shareholders from the point of view of present and future value creation."

So this merger for the 500 million shares of Calpine outstanding after its bankruptcy would be an all-stock offer for 0.534 shares of NRG per Calpine share.  After looking at its ten points, here are some of the expectations that NRG sees from the combined operations:

• A 45,000MW producer, with a $38 Billion enterprise value and a $20 Billion market cap.
• A diversified power source producer with regional diversification.
• Stock liquidity as a must-own company for investors in the sector.
• Tax optimization.
• Savings in general and administrative costs of $100 million annually, with additional savings as well.
• Stronger financial and credit enhanced operations.
• A growth platform not dependent upon chapter 11; and advocacy in carbon and other areas.

Right before the close today, NRG shares were off almost 5% at 40.45 and Calpine shares were up 6.4% at $22.65.  NRG shares are still close to 52-week highs and this is the highest that Calpine has been in post-bankruptcy stock trading.

If NRG can pull this off in an all-stock transaction without having to sacrifice its cash, this will ultimately end up being a major victory.  Because of Calpine’s recent years, it isn’t as though the company can claim it is insulted by the offer nor that this wouldn’t help stabilize a post-bankruptcy situation.

Jon C. Ogg
May 22, 2008