This article originally appeared in Fuel Cycle Week #333, 6/24/09
Nancy E. Roth, Managing Editor, Fuel Cycle Week
NRG Energy has failed to convince a U.S. District Court that Exelon misled NRG stockowners about its intentions in its $6.2 billion takeover offer. So said N.Y. District Judge John Koeltl on Friday in a decision dismissing the NRG lawsuit, which the independent merchant generator had filed last March.
But last week the ruling seemed little more than a piece of paper for NRG. The lawsuit has served what in retrospect appears to be one of its key purposes: to stall Exelon’s hostile takeover attempt and push back the crucial NRG shareholder vote on it. Whatever the judge’s decision, the credit freeze meanwhile has begun to thaw—and the Department of Energy has named NRG as one of four finalists slated to receive its coveted nuclear-project loan guarantees. NRG in 2007 was the first of a wave of U.S. energy companies that applied to the Nuclear Regulatory Commission for a license to build and operate advanced new-generation reactors.
Delay Strengthens Hand of NRG
But 2008 was a tough year for the Princeton, N.J.-based power generator. It spent much of the time beating the bushes for joint-venture partners with deep pockets, in the U.S. and abroad, to shore up the financing of two planned GE- Hitachi ABWR reactors at its South Texas site. As the financial market soured NRG could not seal any deals. By October, in the global economic freefall, NRG found itself stranded with $8 billion in debt and murky prospects.
On Oct. 19 Exelon unveiled an offer to exchange 0.485 per share of common stock for each of NRG’s 233 million shares outstanding, valuing NRG shares at $26.10. At the time that represented a 37% premium over NRG’s share price of $19.33, but the NRG board summarily rejected it as inadequate.
Exelon, the 900-pound gorilla of American nuclear utilities, then launched a three-pronged attack on the smaller company. It threatened to sue the NRG board of directors for neglecting its fiduciary obligations to shareholders,while making a direct appeal to stockowners to tender their shares for purchase by Exelon. It also announced a plan to force the company to expand its board to accommodate a set of candidates it planned to nominate at NRG’s annual meeting on May 14.
By the time the offer expired on Feb. 26, Exelon issued a statement that it had won the support of 51% of NRG’s shareholders, and would extend its offer to June 26.
NRG fought back by suing Exelon in federal court in March. The NRG legal team apparently calculated the timing to allow the company to postpone its shareholder meeting, which is now set for July 21—and, hopefully, to realize some gains in an improving economy.
The delay seems to have strengthened NRG’s hand. Its share price now almost matches the Exelon offer, reducing the stockowners’ premium to 3.6%. That allows the company to press its earlier warning to shareholders that Exelon showed signs of financial weakness (FCW #319, March 18). Exelon’s announcement last week of a 500-job cut by the end of August did nothing to dispel NRG’s claims.
Exelon: Pressure to Raise or Retract Bid
On June 17 NRG issued a statement noting that as of June 16 only 12% of its shareholders still supported the Exelon bid—meaning that roughly three-quarters of those that Exelon recruited had now withdrawn their tenders. “NRG believes the low number of shares tendered reflects [shareholders’ understanding] that the value NRG has created over the past eight months greatly outweighs the value of Exelon’s proposal,” the company said.
Analysts cited by Dow Jones linked NRG’s gains to the acquisition of Reliant Energy’s retail business—and “progress” in its nuclear projects, undoubtedly referring to the DOE loan guarantees. Although the Energy Department will not award any guarantees until 2011, when the Nuclear Regulatory Commission is expected to start issuing Construction and Operating Licenses, the federal government’s promised backing undoubted enhances investor confidence in NRG (FCW #316, Feb. 25).
Credit also seems to becoming more available for nuclear projects. Last Friday, for example, Entergy announced that it was reactivating its long-delayed spinoff of Enexus Energy, due to the availability of more credit for the project.
This does not mean NRG and others seeking to build new reactors will suddenly find it easy to attract support, given the cost uncertainties that still dog the industry. But NRG’s turn of fortune may force Exelon to up its offer, after all. Exelon’s board of directors will meet on June 30 to discuss the bid.
For its part, Exelon shows no sign of giving up or sweetening its offer. Analysts at Wachovia Capital Markets wrote last week that Exelon’s bid amount “is likely limited by the potential need to issue new equity to placate rating agencies,” according to the Dow Jones report. Exelon shareholders were not particularly enamored of the deal either, the analysts added.
On June 17 Exelon sent another letter to NRG shareholders urging them to vote in favor of the merger and extending its offer deadline to Aug. 2. In a statement about Exelon’s recent court success, Executive Vice President, Finance and Legal, William Von Hoene said on Monday that the company was now focusing “on the election of nine new, independent and experienced NRG directors who will act in the best interests on NRG stockholders” at the July 21 meeting. The company on June 17 also filed a new definitive proxy statement with the Security and Exchange Commission in connection with the solicitation of proxies for the meeting.
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