Private-Equity Players Snap Up Genco

CenterPoint ( CNP) just threw a curveball.

The Texas utility has decided to shed its valuable generation business -- near its current market price -- in the midst of a crucial regulatory hearing. The company announced on Wednesday that it has inked a $3.65 billion deal to sell Texas Genco to some high-profile private-equity investors. The news comes during the middle of a regulatory hearing designed, in part, to determine Genco's true value.

CenterPoint is seeking to recover stranded costs from its investment in Genco as part of a heated "true-up" hearing in which billions of dollars are at stake. Many people had simply assumed that CenterPoint would wait for a final ruling from regulators, due next month, before proceeding with the sale.

"I was very surprised at the timing -- but not at the price," said Harry Chernoff, an analyst at Pathfinder Capital Advisors who owns Genco stock.

The transaction requires Genco to first buy out the public investors who own 19% of its stock at a price just 52 cents above Tuesday's close of $46.48 a share. CenterPoint will then turn around and sell the rest of the company for an even lower price, $45.25 a share.

Chernoff believes CenterPoint is receiving an "excellent price" -- far above Wall Street predictions -- for the generation company. But some Genco investors feel shortchanged about the sellout to a new firm controlled by the Blackstone Group, Hellman & Friedman and Kohlberg Kravis Roberts.

Some were hoping for a secondary offering of Genco's remaining stock instead. They feel that public investors would pay more for the stock and then go on to benefit from things like operational improvements, share buybacks and higher dividends. They believe that CenterPoint has continually failed to maximize Genco's value and -- in a final blow -- is now selling the company to private owners on the cheap.

Genco's stock actually inched past the $47 sale price, on unusually heavy volume, even though buyers could make more on risk-free Treasuries than on a transaction set to close months down the road. Some, therefore, suspect that the current deal -- which attracted competing parties -- could eventually be topped.

Even Chernoff viewed Genco's stock action strange. But he considered the movement of CenterPoint's shares -- which slid 4.6% to $11.65 -- even more bizarre. He expected CenterPoint's stock to jump instead on news of a $3.65 billion transaction that requires no regulatory approval or expensive banking fees.

"That's a very big number to CenterPoint," he said. "It's a lot of money, a lot of certainty and a lot of efficiency."

Chernoff pointed out that Prudential had pegged Genco's value at a mere $36 a share when starting coverage on CenterPoint just yesterday. And the firm recommended buying CenterPoint -- partly because of Genco's "underappreciated" value -- on the basis of that low figure.

Even CreditSights analyst Dot Matthews, a longtime CenterPoint bull, assumed the company would get no more than $40 a share for its stake in Genco. She is now convinced that CenterPoint, which has few fans on Wall Street, is even more undervalued than she thought.

"I can't imagine why the stock is off," Matthews told TheStreet.com on Wednesday. "Why would it run up in anticipation of the Texas Genco sale and then -- when the company gets more than anybody expected -- go down?"

Matthews, who owns 200 shares of CenterPoint herself, sees many things going the company's way. She says that CenterPoint is poised to collect more than $5 billion -- at least -- from its Genco sale and true-up hearing. She says the company can then pay down debt -- including a high-interest loan due next year to Warren Buffett -- secure a safe investment-grade rating, raise its dividend and still generate "nice regulated cash flow."

For now, however, she acknowledges that only two of the 12 analysts who follow CenterPoint -- besides herself -- recommend buying the stock. But she also expects that scenario to soon change.

"We do not believe the full ramifications of CNP's upcoming recapitalization are accurately reflected in either current bond spreads or the current stock price owing to the complexity of CNP's story," Matthews wrote in a note issued even before the Genco sale. But "after the Texas Public Utilities Commission issues its final financing order (in the current hearing), we expect several of these analysts will incorporate the new business mix and earnings into their models and upgrade the stock."

In the meantime, Matthews herself made a move. She raised her earnings estimates and target price for CenterPoint and reiterated her outperform rating on what is her top pick in the sector.

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