Another Hedge Fund has been created to buy more U.S. assets

Yesterday, Friday, Sept. 7, shareholders of TXU, the huge Texas utility, agreed to proceed with the largest buyout in history. Texas Energy Future Holdings, a holding company of private equity firms Kohlberg Kravis Roberts (KKR) and Texas Pacific Group, agreed to buy the utility for $69.25 per share, in a deal that may be the last hurray of mega-buyouts--if it doesn't fall apart in the interim.

There are several hurdles left to surmount, including approval by the Nuclear Regulatory Commission and the Public Utility Commission of Texas. The largest hurdle of all will be the financial system itself, busily converting trillions in "assets" into thin air as it collapses. All told, the deal may end up costing $45 billion.

The speculation is that banks will not be able to provide the necessary cash to the Hedge Fund to allow it to complete the buyout. It is like investing in D-marks in 1923.

...then this announcement appeared in April'07

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April 18, 2007
TXU Buyout Proceeds

Since no other bidders have offered a higher bid, the private equity purchase of TXU by Kohlberg Kravis Roberts and by Texas Pacific Group will go through pending regulatory approval and assuming no legislative roadblocks are thrown up. Bloomberg.com has the story .

April 18 (Bloomberg) -- TXU Corp., the largest power producer in Texas, will proceed with a $32 billion buyout by Kohlberg Kravis Roberts & Co. and TPG Inc. after failing to receive a higher bid.

The buyout received critical support from the environmental groups Environmental Defense and Natural Resources Defense Council after the buyout firms agreed not to contruct 8 of 11 planned coal-fired power plants in Texas. Coal-fired power plants are one of the largest sources of the greenhouse gas carbon dioxide which is causing global warming.

http://www.blueclimate.com/blueclimate/climate_change_business/index.html

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February 27, 2007
WSJ On-Line

In TXU Deal, Texas Regulator Has Few Levers to Pull
By Rebecca Smith, Susan Warren and Dennis K. Berman

Texas regulators have little authority to challenge or block the proposed $32 billion private-equity buyout of utility titan TXU Corp., which could ease the deal's completion despite opposition gearing up in the state. Meanwhile, potential rival bidders considered their options.

A group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group announced a proposed acquisition of TXU yesterday, in a deal that includes the assumption of more than $12 billion in debt. The deal, which would be the largest leveraged buyout ever, was made after the prospective buyers negotiated with environmental groups to reduce TXU's debate-stirring plans to ...

http://online.wsj.com/article/SB117249171072619202.html?mod=home_whats_news_us


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Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity
February 27, 2007
By ANDREW ROSS SORKIN

Wall Street banks have provided billions of dollars to finance takeovers in the last year, essentially serving as mortgage lenders to deal-hungry private equity firms, which are among the banks’ best-paying customers.

Now the lenders have created a new type of loan that has them ponying up part of the down payment on these deals as well. That trend is vividly illustrated in the $45 billion buyout of the Texas energy giant TXU, which was announced yesterday. There are risks in the transaction, as there are in any large buyout, but for the Wall Street banks behind the deal, it could be even riskier.

In an unusual twist that may soon become common, the banks are going one step further than simply providing the debt financing involved in the deal, in this case a daunting $24 billion of debt.

The banks are also lending $1 billion to TXU’s buyers, Kohlberg Kravis Roberts & Company and the Texas Pacific Group — not as secured debt, but in the form of equity using the bank’s own cash.

Known as an “equity bridge,” the arrangement allows leveraged buyout firms to buy companies with even less cash upfront. The idea is that the leveraged buyout firms will find other investors to ante up cash after the deal is announced.

These bridges can lead to trouble, however. If the private equity firms cannot find new investors — and it is their job, not the banks’, to find them — or if the value of the asset falls sharply, the banks are left holding the bag.

“This is how things blow up; people take more risk,” said Andy Kessler, a former research analyst and hedge fund manager who has written books about Wall Street. “If you go back to the crash of 1987, all the banks had huge bridges that went bust.”

Some have compared the use of the equity bridges to a much more risky version of Michael R. Milken’s famous “highly confident” letters in the 1980s takeover boom, which gave assurances that his firm, Drexel Burnham Lambert, could sell junk bonds to finance deals for its clients.

Investment bankers say that the private equity firms, which have become some of the largest fee payers to Wall Street, put pressure on them to extend an equity bridge in exchange for syndicating the debt, a job that can prove very lucrative.

“The bridge may be a pay-to-play,” Mr. Kessler said.

The new tactic has appeared in a handful of deals recently, including the $39 billion takeover of Equity Office Properties this month. It lets a private equity firm pursue enormous transactions without bringing in partners, at least until it has negotiated a deal on its own terms.

Indeed, the advent of the equity bridge could spell the end of giant consortium transactions, or club deals, in which often rival private equity firms team up on a bid. In the $11.3 billion buyout of SunGard Data Systems in 2005, for example, seven private equity firms banded together, each with a seat at the negotiating table.

The use of the equity bridge may instead spur private equity firms to be more competitive in bidding, because they would not need to forge temporary alliances of convenience with rivals to mount large bids. And that would take some pressure off the firms, which have been under scrutiny by the Justice Department over whether the consortiums constitute a form of collusion.

In the case of TXU, Kohlberg Kravis and Texas Pacific are expected to invite their limited partners — the investors in their own funds, like big pension plans — to invest directly in this deal. By investing alongside the private equity firms, these investors can share in the rewards if the deal pays off without paying the same enormous fees to the firms that they typically do to invest in their funds. Private equity firms offer direct investment as an inducement to also invest in their funds that do carry fees.

The TXU buyout calls for about $8 billion of cash upfront, $24 billion of new debt and the assumption of about $13 billion in debt.

Kohlberg Kravis and Texas Pacific are each putting up about $2 billion in cash. Goldman Sachs, Lehman Brothers, Morgan Stanley and Citigroup plan to invest $3 billion from their private equity arms.

That brings the cash total to only $7 billion, $1 billion short of the $8 billion required. That’s where JPMorgan Chase, Morgan Stanley and Citigroup are planning to come in with a $1 billion equity bridge.

The risk to the banks is that the value of TXU could fall sharply below the $69.25 being offered. Yesterday, TXU shareholders welcomed the deal, driving up the shares 13 percent, to $67.93.

The deal still must undergo months of scrutiny from state and federal regulators. And while the deal has won support through pledges to cut electric rates and scale back a plan to build coal-fired power plants, the private equity firms must still overcome a perception that buyout buyers are temporary owners who are not beholden to shareholders or customers.

http://rjrcos.blogspot.com/2007_02_25_archive.html


Then last Monday this announcement appeared:

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Walk talk at TXU draws a sceptical response

Buyout groups KKR and TPG are being pressed to abandon their $45bn acquisition of US energy group TXU by the banks charged with syndicating $37bn to finance the deal, according to The Times.

Indeed, Goldman Sachs, Morgan Stanley, Citigroup, Lehman Brothers and JPMorgan have reportedly offered to pay the $1bn break fee enshrined in the takeover agreement if the private equity firms agree to walk.

Yet The Times says KKR and TPG are keen to press on, focusing instead on a shareholder vote at TXU, slated for Friday.

The TXU takeover was the biggest buyout on record when it was first agreed in March.

Darren Laurenport of New York, commenting on the story on The Times website, notes:

If this report is true, the banks will likely face lawsuits from shareholders and from TXU in the very near term…TXU is run by a serious board and management team and the shares are controlled by hedge funds that are more than willing to take the gloves off should the I-Banks interfere with the deal.
The idea of the banks encouraging abandonment of the TXU deal, and offering to pay the associated costs in the process, first circulated at the end of July - drawing a slew of similarly sceptical comments at the time.

It also triggered a forthright entry in the Reuters DealZone blog:

An interesting theory, no doubt, but one that sources tell DealZone is far-fetched, or in British terms: “bollocks.”

This entry was posted by Paul Murphy on Monday, September 3rd, 2007 at 8:27 and is filed under M&A, Private equity.

http://ftalphaville.ft.com/blog/2007/09/03/6997/walk-talk-at-txu-draws-a-sceptical-response/


Finally on Friday the vote by the share holderd cam and they agreed to accept the offer:

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Despite Market Swings, TXU Deal Looks Solid
September 7, 2007, 12:15 pm

The largest leveraged buyout in United States history moved closer to becoming reality on Friday, when shareholders of TXU, the Texas utility company, voted in favor of a $45 billion proposal to take it private.

Judging from TXU’s recent stock price, the markets appear relatively confident that, despite the hair-raising markets in recent weeks, Kohlberg Kravis Roberts and TPG will end up buying the company at the previously agreed $69.25-per-share price. The stock was trading at a 2.6 percent discount to that price Friday, compared to a gap of nearly 9 percent a month ago, when the deal’s prospects seemed a lot shakier.

For one thing, some of the regulatory issues related to the transaction have since been sorted out.

For another, the market environment has shifted dramatically. Whereas there had previously been grumbling in some quarters that the offer was too low, those complaints seemed to vanish as tumbling stock prices made the deal a lot more attractive than the alternatives.
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http://dealbook.blogs.nytimes.com/2007/09/07/despite-market-swings-txu-deal-looks-solid/#more-17183

Now Goldman Sacks agreed to finance the buyout and the question will be where will they get the funds?