As has been rumored, Talen Energy (TLN) said Friday that Riverstone Holdingsis buying the 65% it doesn't own of the power producer for $1.8 billion, only a year after it started trading and for 25% less than its initial trading price.

Riverstone is offering $14 per share in cash for Allentown, Pa.-based Talen, a 56% premium over its $9 closing price on March 31 before reports surfaced of its possible sale and a 101% premium over the company's volume-weighted average price of $6.95 over 60 days ending March 31.

The transaction has an enterprise value of $5.2 billion, including around $4 billion in debt.

Talen's stock jumped almost 16% in pre-market trading to $13.82 per share. Shares continued rising after the open and traded at $13.96 per share mid-morning. 

Riverstone already owns 35% of Talen's shares, which began trading in June of last year when the private equity firm combined some of its power plants with those of PPL Corp. (PPL) - Get Report .

The agreement includes a 40-day "go-shop" period when Talen may actively solicit, receive, evaluate and potentially enter into negotiations with parties that offer alternative proposals. Talen can talk with parties for 20 more days if they've made a "qualifying" offer during the go-shop period.

Talen will pay Riverstone $50 million if their agreement is terminated for a better offer, but that number would be reduced to $25 million if Talen accepts a better proposal during the go-shop period.

Riverstone co-founders David Leuschen and Pierre Lapeyre Jr. said in a joint statement that the private equity firm is excited to acquire Talen and its generating fleet, which is in some of the U.S.' most attractive power markets.

Talen has been suffering from low natural gas prices since its formation a year ago and lost $341 million last year. Its stock started trading at around $18.50 on June 2 and dipped to $5.76 in January.

Analysts at energy-focused investment bank Tudor, Pickering, Holt wrote in a report that they see minimal equity value in Talen given that it's an over-levered, undersized generator operating in the Northeast with coal and nuclear plants struggling to compete with new combined-cycle gas turbine plants being rapidly built on top of the Marcellus Shale. They also think it's unlikely anyone tops Riverstone's offer.

"Riverstone ... will likely lever up the entity even more on the secured debt level and play the entity as a levered option on a natural gas/power price recovery," they said.

Bond research firm CreditSights said the deal values Talen at 6.7 times enterprise value over expected earnings this year, below competitors Calpine Corp. (CPN) , which trades at about 9.1 times; Dynegy Corp. (DYN) , trading at about 8.1 times; and NRG Energy (NRG) - Get Report , at about 7.4 times; because of its declining Ebitda profile. Analysts Andy DeVries and Greg Jones said they think $1.2 billion funding requirement will be met with $920 million in new equity along with the announced new $250 million secured term loan.

The analysts think Riverstone is buying Talen for two reasons: They see it as a longer term view on natural gas prices improving and taking power prices higher and Riverstone having the balance sheet that allows for building new combined cycle natural gas plants at its existing coal plants in the PJM power market. "With land, generation permits and transmission access already secured, TLN can build new combined cycle gas plants quicker and cheaper than the typical $900 per kilowatt for new greenfield plants," they said. "Talen in its current form didn't have the balance sheet to pursue these growth opportunities."

The deal has to clear stockholders, Hart-Scott-Rodino, the Nuclear Regulatory Commission and the Federal Energy Regulatory Commission and Talen has to have a minimum amount of cash and revolving credit facility available at closing. Talen and Riverstone hope to close the deal by the end of the year.

Talen owns or controls 16,000 megawatts of capacity in eight states.

Talen CEO and president Paul Farr said in a statement that management believes the transaction offers compelling value to its stockholders while eliminating execution risk.

Talen chairman Stuart Graham said "disinterested" directors of its board, not including the two Riverstone directors, carefully analyzed Riverstone's offer with the assistance of its financial and legal advisers and, after "extensive negotiation" and "thorough" consideration, concluded that the agreement was in the best interests of Talen's stockholders.

The $1.8 billion in consideration is expected to be funded by a conversion of Riverstone's 35% Talen stake into shares of the surviving corporation, Talen's cash on hand and proceeds of a $250 million new secured term loan.

The loan has been committed by Goldman Sachs Bank USA, Royal Bank of Canada, Barclays, Credit Suisse and Credit Suisse, Deutsche Bank Securities and Deutsche Bank AG New York Branch, Morgan Stanley Senior Funding Inc. and the Bank of Tokyo-Mitsubishi. It will rank pari-passu with the existing first lien revolving credit facility of Talen unit Talen Energy Supply, which will be reduced to $1.4 billion from $1.85 billion at closing.

All of Talen Energy Supply's units that guarantee its revolving credit facility have executed guarantees of their parent's outstanding unsecured notes due 2025 and its Pennsylvania Economic Development Financing Authority revenue bonds, which together make up $831 million of its $3.3 billion in unsecured debt that will remain outstanding.

As a result of the new credit support for the 2025 notes and the municipal bonds, Talen said it expects that these notes and bonds will be structurally senior to the non-guaranteed unsecured debt of Talen Energy Supply and that the issue ratings on the 2025 notes and the municipal bonds will be maintained or improved.