TXU - Greenmail?

Masters of the Universe

The Environmental Defense Fund announced a "Global Warming Victory" last week, referring to its participation in the record breaking $44 billion dollar buyout proposal by Kohlberg Kravis Roberts & Co.(KKR) and Texas Pacific Group (TPG) for TXU Corp. (TXU). Said EDF, "Our staff brokered a deal that marks a turning point in the global warming fight."

However the Wall Street Journal called the deal "The New Greenmail" (February 27, 2007). Recounting the reactions to TXU's announcement last year that they would build 11 new coal burning plants, the WSJ noted:

"TXU had painted a green bull's-eye on itself when it announced plans last year to build the 11 new plants....The announcement sent the environmental movement to the barricades against TXU, and may be one reason that the company's stock, after going up regularly for several years, sputtered and stalled in 2006".

The article suggested that the environmental groups actually aided the equity firms by bringing down the value of the company, therefore making it an attractive takeover target. Greenmail, from blackmail, typically refers to "the practice of buying enough of a company's stock to threaten a hostile takeover and reselling it to the company at a price above market value". The term comes from the strategy was popularized by corporate raiders like T. Boone Pickens, Sir James Goldsmith and Carl Icahn, as well as KKR, all notorious for their lucrative greenmail schemes. Hoovers describes the KKR greenmail strategy like this:

"The barbarians at the gate are now knocking politely. The master of the 1980s buyout universe, Kohlberg Kravis Roberts (KKR) has shed its hostile takeover image for a kinder, gentler, buy-and-build strategy..."

The Wall Street Journal's view of the TXU deal as the "new greenmail" is interesting, as are the hopeful claims by the the national environmental groups. According to optimistic environmentalists, EDF's tactics "set a new benchmark in energy business strategy that will reverberate across the industry and throughout the corridors of Washington", as the Natural Resource Defense Council (NRDC) put it. However it's unlikely that either of these views are entirely correct.

The stock price didn't quite "sputter" on the company's April 21, 2006 announcement for the coal plants. The price was about $45.00 per share at the beginning of April, rose though $50.00 on the announcement April 21st, and continued rising through September and October, when it peaked at $67.00 per share. TXU stock was $64.00 per share in the beginning of November. It slid after TXU lowered its profit projection for 2007 on November 7th based on projected costs to build the new plants, but rebounded to the mid-60's after the buyout offer. It is even more difficult to argue for a decline taking a longer historical view -- 5 (152% gain) or 10 (223% gain) years. You could argue otherwise, but the leveraged buyout is hardly looks like any flavor of greenmail.

Texas: Acting Locally

Despite positive press coverage about the new environmentalism in place like the New York Times and NPR, the deal did not have universal appeal. What's as interesting, if you follow the progress of efforts to persuade businesses to cut back on emissions, is the complicated politics that proceeded the national environmental agency's entrance into the deal.

Although the national environmental groups grabbed the limelight following the announcement of the deal, there was a lot of effort on the local and state level before they arrived. The mounting backlash against TXU and its effect on the stock, if there was any, was most likely due to the efforts millions of stockholders, government, citizens, businesses and state environmental groups .

Four Texas environmental firms challenged Governor Perry's questionable fast-track approval of TXU's coal plant proposals and in response a district judge blocked the governor's 2005 executive order a couple of weeks ago. (Governor Perry is notorious for denying climate change and its scientific evidence, although over the past couple of weeks he might be falteringly changing his tune.)

The mayors of Dallas, Fort Worth, and Houston loudly rejected the proposal, as did 7 million people in 30 municipalities and several regional business associations.

Three shareholder groups also protested the company's decision. The New York City Pension Funds and Connecticut State Treasurer's Office drafted resolutions questioning the company's ability to successfully address probable regulatory measures around C02 emissions. A third shareholder resolution challenged the company's lack of emphasis on energy efficiency.

Regulatory challenges became more likely with the change of government in the November 2006 election and the likelihood of more federal regulatory measures being passed. For example Senate Bill S.280, the Climate Stewardship and Innovation Act, introduced by Sens. John McCain, R-Ariz.; Barack Obama, D-Ill.; and Joe Lieberman, I-Conn, was introduced on January 12, 2007. TXU's canceled plants are considered the "tip of the iceberg", by some industry analysts who predict that further federal regulation is inevitable and will continue to affect utilities expansion decisions.

In fact recent revelations suggest that TXU had already planned to shelve some of the plants ahead of the two national environmental group's participation. According to the WSJ "What the environmentalists didn't learn until later was that TXU's board already was considering killing some of the projects to quiet public outcry and to respond to changing political winds in Washington." (March 3, 2007).


Did the equity firms' decision to invite the national environmental groups (NDF and NRDC) amount to "green-washing", as some claim? We would like to think not. In addition to Texas' own very vocal population, many of the participants in the deal are environmentally astute and realistic, including the principals at the Texas Pacific Group.

But this doesn't mean Texas energy concerns abate. Demand for energy in Texas is expected to increase. Texas will need to pursue multiple energy options. It claims that it already produces more windpower than any other state, and TXU proposed 3 new nuclear power plants last year without a stir.

As far as the three plants that weren't axed in the current 10 point deal, there is strong opposition to their construction. The plants are scheduled to burn lignite, which is a local "dirty coal", high in emissions, mercury containing, and rife with potential pollution and health consequences.

These health and climate realities throw doubt on the suggestion that increasing demand might eventually trump environmental complaints. TXU hasn't helped its public perception by increasing consumer utility prices in deregulated areas by 80--110% since 1999. The company was repeatedly criticized for gouging the customers. TXU now faces public relations problems, emissions concerns, local energy supply concerns and rising demand.

Although, as the WSJ said, "the private-equity crowd didn't get to be billionaires for nothing."(02-27-07) Optimistically the deal will usher in real, incremental solutions, albeit profitable ones.

follow us on twitter!