TXU Sparks Takeover Talk

The deal will still require various regulatory approvals, and there's sure to be plenty of opposition and positioning from TXU customers looking for concessions.

TXU is a unique utility in that it has strong portfolios of both regulated and unregulated assets. While the regulated utility provides a solid, stable base of business, the unregulated generation business offers an opportunity for growth, a fact that hasn't likely gone unnoticed by the private-equity group, led by Kohlberg Kravis Roberts and Texas Pacific Group.

Public to Private

For good reason, TXU will be the talk of the town today. Yet, for investors, the more relevant question is what could come next.

Recently, Mirant (MIR Quote) sold assets to LS Power for nearly $1.4 billion, and in April 2006, NorthWestern Energy (NWEC Quote) agreed to sell to Babcock and Brown Infrastructure for $2.2 billion. Although those deals aren't nearly as large as the TXU buyout, they do suggest a keen interest in power assets among private-equity investors.

Other private companies such as Tenaska are also on the prowl for new development opportunities as well as established power generation assets. And, while not private, Warren Buffett's Berkshire Hathaway (BRK.A Quote), through its MidAmerican Energy Holdings, has said it is willing to spend billions in the power market if the right opportunities are found.

Independent power producers like Mirant and AES (AES Quote) have to be discussing the pros and cons of going private with the backing of firms like KKR, Blackstone, Carlyle and others. Although there's no indication that any of these firms are eyeing specific assets, private-equity firms tend to focus on similar sectors.

Consolidation

In addition to private equity's influence on the sector, KKR's move will probably raise the possibility of additional consolidation among the smaller, regional utilities. Although regulatory hurdles remain, the continued growth of large utilities may spark a stronger urge for smaller utilities to get bigger.