Mirant

( MIR) shares rallied Wednesday after activist hedge fund Pirate Capital sent a letter to chairman and CEO Edward Muller requesting a $4.7 billion share buyback and recommending the company put itself up for sale if the effort fails to move the power generator's stock by year-end.

The Norwalk, Conn.-based hedge fund only owns 1.6% of Mirant stock but has lately played a pivotal role in influencing management of the company. At current prices, a $4.7 billion buyback would total approximately 182 million shares, or about 60% of the company's outstanding shares.

The buyback proposal, expressed through a 13D regulatory filing, comes a week after Pirate successfully convinced Mirant management to withdraw its $8 billion unsolicited bid for

NRG Energy Inc.

(NRG) - Get Report

.

Pirate was not alone in its rebellion against the company's planned purchase, but was perhaps the most vocal dissident stockholder. Two other hedge funds, Omega Advisors and Jana Partners, also urged the company to drop its bid, considered less advantageous than an outright sale of the company. On June 12, the company under pressure appeased its activist shareholders and gave up its plan to buy NRG

A spokesman at Mirant declined to comment. Calls to Thomas Hudson, Pirate's founder and to Barry Rosenstein, managing partner at Jana, were not returned. Leon Cooperman, founder of Omega, declined to comment.

Since the decision to drop the NRG bid, Mirant shares were up 5% heading into the Wednesday session; the stock was recently up 1.6% to $25.75.

Hudson included a detailed financial analysis in his filing, giving recommendations on how to "maximize long-term stockholder value." In his view, Mirant is "undervalued" and "underleveraged" and has "valuable domestic and international assets," the filing states.

Hudson values the company at $32 a share. Upon completion of his suggested buyback plan, he sees the stock moving up to $40. The plan, he adds, would allow the company to trade at the peer-group forward price-to-earnings ratio of 18.3 vs. its current PE of 13.7. Mirant's main competitors are NRG Energy,

Reliant Energy

(RRI)

and

Dynergy

(DYN)

.

If by year-end the plan fails to close the value gap between Mirant and its competitors, the company should be put for sale, Hudson says, naming

American International Group

(AIG) - Get Report

, Ontario Teachers Pension Plan and Macquarie Bank as potential suitors.

Mirant produces and sells electricity in the U.S., the Caribbean and the Philippines. It owns or leases approximately 17,300 megawatts of electric-generating capacity globally. The company also operates an asset-management and energy-marketing organization from its headquarters in Atlanta.

Hudson estimates that the company can generate approximately $4.7 billion in cash, which should be entirely used to buy back its stock. Most of the cash would be generated by sales of assets in the Philippines and the Caribbean.

Hudson's analysis breaks down sources of cash based on whether they can be extracted on the short- or mid-term horizon. Overall, his plan spots $2.74 billion of short-term cash available and $2 billion in mid-term sources of cash, which combined should support the buyback proposal.

Sources of immediate cash include $1.3 billion available on the balance sheet, Hudson writes. In addition, he suggests borrowing $500 million. Hudson also wants Mirant to extract $940 million from the proceeds of a recapitalization plan for the company's Philippines assets. As mid-term sources of cash, Hudson identifies $1.2 billion from the proceeds of the sale of remaining Philippines equity and $775 million of proceeds from the sale of Caribbean assets.

Hudson believes there is a strong and financial rationale for selling Mirant international business in the Philippines and the Caribbean. It would eliminate a volatile emerging market exposure and would transform the company into a pure-play U.S. generator, potentially more attractive to U.S. investors.

Hudson also recommends additional actions such as the election of shareholder representatives to the board and a potential sale of domestic non-core assets.

Representatives of Pirate and Mirant are scheduled to meet Wednesday. The company announced meetings to be held with as many shareholders as possible, Wednesday and Thursday in New York and in Boston on Friday.