Sheila McNulty NRG argues Exelon takeover is not a done deal

NRG, the US power generator, is objecting to talk by Exelon that it will have its hostile takeover of NRG completed by the end of the year to form the largest US power producer.

NRG, which has been pushing back against the $6.2bn bid, notes that the approval from FERC (Federal Regulation and Oversight of Energy) regulators, granted last week, in no way guarantees the deal will go through. Indeed, NRG says, numerous approvals still must be obtained:

The proposed transaction must receive approval from both NRG and Exelon stockholders as well as approvals from the Department of Justice and the Nuclear Regulatory Commission. Exelon must also obtain regulatory approval from the state public utility commissions of California, New York, Pennsylvania and Texas, as well as file a notice in Illinois.  A Massachusetts law may give the state public utility commission jurisdiction to review the proposal and, if applicable, would require a high level of shareholder approval.

Exelon hailed the FERC approval as a milestone. But NRG notes that FERC approval has been granted in the past, only to have a transaction fail.

Exelon has faced similar regulatory review in two previous failed transactions – Public Service Enterprise Group (PSEG) and Illinois Power. In the case of PSEG, Exelon received approval from FERC, yet after two years and after spending approximately $130 million in the process, it still was unable to consummate a transaction.

Nonetheless, NRG sees the regulatory issues as beside the point. For it, the key issue is that Exelon has not offered appropriate value to NRG stockholders.

The NRG Board and management team continue to believe that Exelon’s proposal significantly undervalues NRG and remains highly conditional, including the need to obtain financing, and very risky because of rating agency and other concerns.

Bankers have said that NRG has about $8bn debt which, upon a change in control, must be refinanced. Although details of how that will be handled have yet to emerge – given the difficulties of the credit crisis, Exelon already has won support from holders of 51 per cent of the outstanding shares of NRG common stock. It has extended its offer until June 26, while seeking the rest of the regulatory approvals, secure that, given the current environment, the price it has offered is fair.

One of the reasons NRG believes it should be valued higher than Exelon has done is its nuclear position. At the end of 2007, it filed the first application to build a new nuclear plant in the US in 29 years, taking a leading role in moving US electrical generation to cost-effective power that does not contribute to global climate change.

But the economic downturn, credit squeeze and drop in commodity prices have all combined to slow a nuclear revival. All those companies keen to build new nuclear plants in the US have applied to the Department of Energy for loan guarantees, but of the $18.5bn authorised for the programme, none has been handed out so far.

NRG is still in the running to receive some of that but it is unclear whether approvals, which would further strengthen its arm as a standalone entity, will come on time to help it in the battle for control of NRG at the end of June.

Related story:

Exelon moves a step closer to buying NRG Energy (FT Energy Source, 22/05/09)