NRG rejects 'opportunistic' Exelon bid

10 November 2008

The board of US electricity generator NRG has unanimously rejected Exelon's bid for the company, saying the unsolicited offer grossly undervalues the company and is not in the best interests of its shareholders.


A six-page letter sent by NRG president and CEO David Crane and chairman Howard Cosgrove to Exelon chairman and CEO John Rowe describes Exelon's bid as "opportunistic" and sets out in detail NRG's rationale for its rejection. Not only does the Exelon proposal undervalue NRG both on an absolute basis and relative to Exelon's share value, says NRG, the proposed fixed exchange ratio of 0.485 would result in NRG stockholders owning 17% of the combined company while contributing 30% of its 2008 cash flow. Furthermore, Exelon has not secured committed financing to back the offer. Indeed, according to NRG, Exelon had already admitted that it would only be able to arrange fully committed financing "if NRG works with Exelon to make our financial resources available to you."


Exelon made its offer to acquire NRG in a stock-for-stock transaction, with NRG common shareholders exchanging their stock for Exelon stock at the fixed ratio of 0.485 Exelon shares per NRG share, on 19 October. The deal would have valued NRG at around $6.2 billion. However, only two days later, Exelon's own corporate credit rating was downgraded by rating agencies, making it less attractive to investors. (A downgrading of Constellation Energy Group's credit rating has been cited as a major factor in the run-up to the September buyout of Constellation Energy Group by MidAmerican Energy Holdings).


Had the NRG-Exelon merger gone ahead, it would have resulted in the creation of the largest power firm in the USA with 47,000 MWe of generation capacity including 18,000 MWe from nuclear power plants. The company would have had a market capitalisation of $40 billion, and an overall value of $60 billion.


Too risky?


The NRG letter goes on to itemize the myriad ways in which the company feels that Exelon's offer would be detrimental to NRG's future. Included in this list is the companies' differing approaches to nuclear technology, with NRG asserting that its approach of deploying proven technology for its nuclear new build programme is less risky than Exelon's approach. (Exelon has submitted a combined construction and operation licence (COL) application to build two GE-Hitachi Economic Simplified Boiling Water Reactors (ESBWRs) at a new nuclear site in Victoria County in Texas, while NRG has submitted a COL to build two Advanced Boiling Water Reactors (ABWRs), also designed by GE-Hitachi, at its existing South Texas Project nuclear site. Neither of the designs have yet been built in the USA, but unlike the ESBWR, several ABWRs are already in operation in other countries.)


NRG describes itself as a "competitive power generation company". It owns 22,880 MWe of generating capacity, including 44% of the 2500 MWe at the South Texas Project nuclear power plant. Through its Exelon Generation subsidiary, utility Exelon has a portfolio of 33,000 MWe of generating capacity, including seventeen reactors at ten sites operated by Exelon Nuclear.
Exelon perseveres
Exelon expressed disappointment at the decision of the NRG board to reject its offer. However, it has said that it will now present its offer to NRG's shareholders directly.
John Rowe, chairman and CEO of Exelon, said: "While we would have greatly preferred to enter into direct negotiations with NRG's board and management, their decision to reject our proposal, without any discussion with us as to the merits or structure of our proposal, has left us with no choice but to bring the offer directly to the NRG shareholders." He added, "Based on the positive investor response to our proposal, we expect our exchange offer will garner strong support from NRG shareholders."


Exelon also announced that it has filed a lawsuit against NRG and its directors alleging, among other things, "a breach of fiduciary duty by NRG's directors for various reasons, including the failure of the NRG directors to give appropriate consideration to, and take appropriate action on, the proposal announced by Exelon." The action seeks relief requiring the NRG board to exempt Exelon's exchange offer from the Delaware business combination statute, and enjoining the board from taking any actions to frustrate the exchange offer.
"Judicial relief is necessary to ensure that the NRG Board complies with its fiduciary duty to provide the NRG stockholders with the opportunity to decide whether to take advantage of transactions offering them substantial premiums," the lawsuit states.