Who says the now-infamous and pervasive credit crunch will hurt private equity? In the case of Dallas-based public utility TXU (NYSE: TXU), which is likely to go private before year's end, the rapidly softening credit markets may just have allowed the deal to become reality.
On Friday, TXU shareholders voted to approve TXU's purchase by private equity firms Kohlberg Kravis Roberts and TPG (formerly Texas Pacific Group) in a deal that, at $32 billion, would amount to one of the biggest private equity buyouts in history. The approval was rendered after Franklin Resources, TXU's largest shareholder, had dragged its feet on the transaction. Franklin claimed that, at $69.25 a share, it undervalued TXU. But with both the credit markets and the stock market having become green around the gills of late, Franklin apparently decided that it would be difficult for anyone bearing a higher offer to gain the requisite financing.
The acquisition of the TXU will hardly be the only stake in public utilities companies by non-utility entities. Indeed, Kohlberg Kravis has already invested in DPL (NYSE: DPL), and Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) owns Iowa's MidAmerican Energy.
But some observers contend that, despite having received a favorable verdict from 95% of the shareholder votes cast, the TXU buyout may not be home free. While the two private equity firms arranged their financing earlier this year, before the credit markets began to crumble, it's apparently still possible that the banks that have agreed to lend $37.4 billion to get the deal done could blanch at the last minute, hitting Kravis and TPG with higher interest rates. The firm's choices then would be to swallow those higher rates, or retreat from the deal after paying a $1 billion break-up fee.
In any event, Fools, we're unlikely to see another private equity deal this big for a while. With credit tightening across the board, the band of firms that proffer huge (and mostly borrowed) sums for public companies, run their new toys for a while, and then reoffer them to the public at higher levels, are entering a changed world. Let's hope they're content to simply massage and upgrade their new charges for a while.
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