The Time's Right for TXU

Updated from 7:12 a.m. EST

The proposed leveraged buyout of Texas electricity provider TXU (TXU Quote) by private equity firms Kohlberg Kravis Roberts and Texas Pacific Group probably couldn't have come at a better time.

Short-term dynamics have beaten up TXU's stock pretty severely over the last six months, even though the long-term outlook for the company is considered by most analysts to be very positive.

Undervalued stock prices combined with strong long-term profit potential make for a good takeover target. Finding such a company is rare, but TXU has likely been appearing on value stock screeners for a while, according to analysts.

The proposed buyout is worth $32 billion in cash to TXU stockholders, or $69.25 a share. Plus, the buyout firms will be assuming $13 billion in debt. If it's approved, the deal would be the largest leveraged buyout in history.

TXU's stock bottomed out at $53.57 on Jan. 29 after reaching an all-time high of $67.83 last September. The stock closed at $60.04 on Friday and was lately jumping 13.3% to $68.01. The takeover price is a 15% premium to the prior close and a 25% premium to the stock's average trading price over the last 20 trading days.

Why is TXU undervalued? For one, natural gas prices have fallen from a record high above $15 per million British thermal units to around $7.50 today. That produced downward pressure on the company's stock, according to Daniele Seitz, energy analyst at investment bank Dahlman Rose & Co. in New York.