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Report Slams TXU LBO

Consultant Roger Gale concludes that the TXU leveraged buyout does not provide inherent or long-term advantages to the customer.

Fortnightly Magazine - August 2007

and the commitment to specific targets, including consequences for not meeting them;

• A requirement that TXU establish a global climate working group with a six-month to one-year charter to develop specific policies and programs for the holding company and its subsidiaries;

• Tough “change-of-control” provisions, including approval processes and penalties, if the buyers decide to sell control of the businesses to others; and

• Assurances that there will be no change in the cost of capital because of the transaction that would result in higher interest costs being passed on to customers.

• Launch a formal collaborative process involving a broad range of public-interest organizations representing low-income customers, retirees, labor, public-power, and cooperative customers, as well as environmental stewards to ensure that a final decision on the buyout is credible and legitimized by key stakeholders.

Not surprising, TXU and its future owners have disagreed publicly with GF Energy’s critique. In an e-mail to the Dallas Morning News , TXU wrote:

“The GF Energy report commissioned by the Dallas Morning News contains significant factual errors and makes unfounded sweeping assertions directly related to the transaction proposed by KKR and TPG. Therefore, we feel those assertions are more appropriately addressed by the investor group proposing to buy TXU and through the ongoing PUC review.”

The group separately sent the paper another e-mail asserting that the GF Energy report endorses its plan if read in its entirety; KKR objected to the report casting doubt on its intentions. Furthermore, KKR highlighted its commitments, namely its promise of “a 15-percent price reduction, price protection through December of 2008, low-income support, strong environmental stewardship, and protection of TXU’s regulated utility business.”

The key criticism of the report is that the new buyers are not sufficiently being held accountable for future capital investment in the company. “The core issue in the proposed buyout is the extent to which the transaction would diminish state oversight. Texas has moved faster than any other state to make the electricity business more competitive, but Texas has also retained significant state control over the rules of the game,” the report states.

GF Energy concludes that if the transaction proceeds, the separate companies into which TXU would be carved, although headquartered in Texas, would be owned by privately held companies located outside of Texas, with fewer disclosure requirements than publicly traded companies like the existing TXU.

The State of the Deal

After Texas politicians, who had threatened to block the buyout, were persuaded to sign off on the deal a few months ago, many believed the only challenge remaining to the TXU LBO was from the bond market.

The recent meltdown in the sub-prime market has raised concerns about the viability of a number of proposed high-yield debt sales that are tied to company buyouts like TXU.

In fact, junk bonds sold in early July soured an already fragile financing market after ratings warnings on billions of dollars of sub-prime, mortgage-related bonds snuffed out appetite for risky debt, according to a Reuters report. A number of deals already had been pulled by early July