Did Mirant Cave In?

Well, this is just . interesting. On the heels of a failed bid to acquire NRG Energy (NYSE: NRG  ) in late May, and vocal agitation from private-equity group Pirate Capital LLC, independent power producer Mirant (NYSE: MIR  ) has announced plans for a fairly sizable share buyback via a Dutch auction tender offer.

If all goes as planned, Mirant will repurchase as many as 43 million shares for as much as $1.25 billion. At the high end of the range, that would represent roughly 15% of its present market capitalization. Mirant intends to fund this transaction through both cash on hand and a loan pertaining to the company's generation business in the Philippines.

In addition, the company will auction off its overseas generating assets. The company has a net power ownership position of about 2,200 megawatts in the Philippines, which contributed $370 million of EBITDA in 2005, and a bit more than 1,000 megawatts in the Caribbean, which chipped in $156 million in EBITDA. Time will tell what sort of offers come to the table, but I would guesstimate that $4 billion could be a ballpark number; eight times EBITDA seems to be in the vicinity of commonly repeated valuation multiples in the independent power space.

With Pirate Capital recently raising a ruckus, it's fair to wonder whether this deal was the logical response to an inability to find sufficiently appealing assets to buy, or whether it was intended to mollify investors stirred up by accusations that management isn't maximizing shareholder value. Whatever the case, I'm not a big fan. I see this sort of buyback as a pretty low-return option for the company's cash.

Quite frankly, if this is the best return that management thinks it can generate with its assets, maybe Pirate Capital is right in its belief that the company should be put up for sale -- lock, stock, and barrel. After all, if TXU (NYSE: TXU  ) and NRG Energy both think that it's worth investing money in new plants, I have to wonder how and why Mirant thinks that its surplus cash is best put toward a sizable tender offer.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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