Is NRG the Next LBO?

A power play makes sense for private equity, some say.
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Twists on the

TXU

(TXU)

buyout trail could pave the way for a private-equity takeout of

NRG

(NRG) - Get Report

.

Shares in NRG, a Princeton, N.J., independent power producer, hit a 52-week high Thursday as the private-equity wave roars down Wall Street. Just months after scoring a big coup with a $32 billion purchase of TXU, private equity could be looking at NRG as its next target in the red hot power sector.

Alternative investment shop Blackstone Group, which is busy hashing out its $4.75 billion initial public offering of stock, is seen as the leading candidate to do a leveraged buyout of NRG.

It isn't known if Blackstone and NRG have had any formal talks about such a move. But the companies share some history via a portfolio of Texas power plants known as Texas Genco. Blackstone acquired the generation array with a consortium including KKR, TPG and Hellman & Friedman, using $900 million in cash, back in 2004. The buyers sold the assets off for a princely sum of $5.9 billion about a year later.

A spokeswoman at NRG Energy declined to comment on speculation and an energy official at Blackstone did not return calls for comment.

"NRG would look much more attractive on a valuation basis," says Paul Fremont, an analyst at Jefferies, comparing a possible NRG buyout with the blockbuster TXU deal. "It's a far superior candidate to be taken out."

Fremont says, depending on how much value is ascribed to ever-rising power prices, NRG could fetch between $100 and $140 a share, or as much as $17 billion. Shares recently fetched $88.

From a private equity standpoint, an NRG deal may make sense on a number of levels. For one, NRG isn't regulated and thus would encounter fewer hurdles than TXU. Any energy company asset sales are subject to Federal Energy Regulatory Commission approval, but as an unregulated entity NRG's transactions would not have to pass muster with local and state regulatory bodies -- which have vexed private-equity buyouts in the past, including TXU's tango in Texas.

Indeed, recent hiccups in the TXU deal could make an NRG deal all that much more appealing to deep-pocketed takeover tycoons.

Despite efforts to preemptively gladhand environmentalists and local government officials, Henry Kravis of KKR and David Bonderman of TPG continue to face opposition. They recently announced plans to cut prices for some customers in a bid to mollify Texas legislators enraged by the company's high utility rates.

And although the KKR/TPG saga likely will culminate in the completion of the TXU buyout, the difficulties ironing it all out have enlivened rumors about other power takeouts, including NRG.

An NRG deal could also be appealing because the company's assets could be sold piecemeal by the buyer. Blackstone used that approach to great effect in its $39 billion takeout of Equity Office Properties Trust.

Moreover, NRG has an alluring array of power plants in the Northeast, Mid-Atlantic and Texas, where demand for electricity is rapidly outstripping supply.

"The location of NRG's assets would lend them more to pricing improvement," Fremont notes. "There's a major cost of capital advantage under a buyout scenario," he adds, explaining that private equity can restructure much of the equity in the company with much cheaper debt.

One energy analyst at a bulge bracket New York firm, who declined to be identified, says NRG would be a logical LBO candidate but wondered aloud if the power producer's stock had gotten too pricey.

To be sure, NRG CEO David Crane has seen about a 20% run-up over the past three months, on the back of increasing energy prices and the TXU buyout.

Since Enron's collapse, the IPP universe has been a volatile one. Many firms including NRG,

Calpine

(CPNLQ)

and

Mirant

(MIR)

went bankrupt and subsequently emerged into a market teed up for consolidation.

Crane has fended off buyout offers from Mirant, which emerged from Chapter 11 last year intent on bolstering its market position and purchasing another IPP.

Mirant's buyout move irritated Crane and Mirant shareholders, who demanded the company sell itself.

Sales adviser J.P. Morgan has been hawking Mirant for several weeks and has drawn interest from private-equity groups including Madison Dearborn and strategic investor

PPL

(PPL) - Get Report

, according to energy news Web site

Sparkspread.com

.

Bankers familiar with the Mirant sale say NRG is not currently interested in acquiring Mirant, even though NRG made an attempt to purchase Mirant while the Atlanta-based IPP was in bankruptcy.

Meanwhile, San Jose-based Calpine, which is expected to file for a plan of reorganization out of bankruptcy on or before June 20, has drawn interest from private-equity investors interested in taking stakes of the entity, as reported on

TheStreet.com

.