In a move that could re-energize the downtrodden independent power industry,
is nearing a deal to purchase
for nearly $3 billion in cash.
Reliant Resources, partially spun off recently from its parent,
, owns power-generating plants in California and the Mid-Atlantic states. Orion -- 37% of which is owned by
-- owns a significant amount of generation in New York, a market many independent producers have targeted for additional development.
Orion has been rumored for some time to be for sale as Goldman planned its exit strategy. Sources say other generators such as
( MIR) looked at the portfolio but chose not to pursue a deal.
The deal -- which sources say would provide Orion shareholders with $2.9 billion in cash, or $26.80 a share -- is the first major pact between two independent power producers. Reliant is to assume nearly $1.8 billion in Orion debt. Orion also has nearly $700 million in cash. Based on Orion's Wednesday closing price of $19.20, the deal is nearly a 40% premium for shareholders. Reliant Resources closed Wednesday at $16.68.
"With Orion's 6000 megawatts of capacity, the deal is worth about $667 per kilowatt," says Simmons & Co. analyst Jeff Dietert. "That's not cheap but near the top end of the range of recent transactions." Assuming the deal is financed with debt, Dietert estimates the acquisition could add between 5 to 15 cents per share to Reliant's annual earnings, "depending on potential synergies."
A Reliant spokesperson would not comment until a formal announcement is made, which sources say will come Thursday morning. Orion could not be reached for comment.
Re-Energizing the Power Producers?
The independent power producers could use some good news, as most of the stocks are trading at or near 52-week lows and most at 50% discounts from their early summer highs.
However, while investors may look to the Orion takeover as a catalyst to reignite the sector, analysts aren't so certain.
"I'm not sure it really helps the others," says Dietert. "Since it's a nonregulated generator taking out a peer, you have to decide who the buyers and sellers are. With the remaining players wanting to be buyers, it isn't likely you'll see much of a seller's premium in any of the other generators as a result."
One energy-hedge fund manager said he can see the other side as well. "It may focus people on the group and the fact they may look cheap," he said, "but it's not a real boost given current prices."
Dietert also said Goldman's decision to sell may be a signal the smart money believes the fat profits from the power-generation business are over. "They view the generation business as coming into balance and are cashing out," he says.
While it isn't likely that other major independent power producers are interested in combining operations, a name often mentioned as a takeover candidate is
. The partial spinoff from
, NRG owns a portfolio of generation that would complement many of the major independent generators as well as other integrated energy companies. Xcel is said to be looking for options to complete the spinoff of NRG, one possibility being the sale of its remaining interest in NRG to another generator.
Ironically, many of the regulated utilities that formed and then spun off unregualted power subsidiaries like Reliant Resources and Mirant now trade at multiples that could make them acquirers of independent generation.
"If you look at some of the regulated utilities, they are trading at premium multiples that make their currencies attractive in acquisitions," notes Dietert. "They could be more aggressive in bidding."
The hedge fund manager notes one integrated utility seems very interested. "
is looking hard at a number of deals," he notes.
Dietert agrees. "At these prices, Duke,
could be looking at a number of deals."
In this market, anything is possible. Take the deal at hand. In this case, the hunter has been hunted.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Mirant, Southern and NRG Energy, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to