NRG, GenOn began their merger talks in April of this year

As part of their usual review of mergers and acquisitions, NRG Energy (NYSE: NRG) and GenOn Energy‘s (NYSE: GEN) predecessor companies had intermittent contact with each other in recent years, including at the time of NRG’s acquisition of its Texas retail business from GenOn (then Reliant Energy) in May 2009.

But prior to the commencement of the discussions in April 2012 that culminated in their proposed merger, NRG and GenOn had not engaged in discussions regarding a potential business combination with each other since the formation of GenOn in December 2010, GenOn said in an Oct. 9 SEC filing. GenOn is the result of the merger of RRI Energy and Mirant Corp. in December 2010.

“A core element of GenOn’s long-term strategy has been to explore strategic transactions to realize stockholder value through cost savings,” the GenOn filing said. “In discussions regarding such strategic transactions in August 2011, the GenOn Board of Directors (referred to as the GenOn Board), recognized that any resulting business combination would need to satisfy a number of criteria, including that the relative value proposition must make sense for both parties, the combined balance sheet must be sustainable and there must be confidence that required regulatory approvals could be obtained in a timely manner. Based on these criteria for determining whether a transaction was realistically achievable, and the fact that none of the other potential transaction partners that GenOn had periodically considered advanced beyond preliminary contacts, by March 2012, a potential business combination with NRG was viewed as the most realistic business combination transaction that was achievable.”

In coming to this view, GenOn took into account factors like: the difficulty that any non-strategic acquirer would have in making an attractive offer and financing an all-cash transaction given GenOn’s substantial indebtedness, refinancing costs and the commodity price environment; the lack of synergies in any transaction with any non-strategic buyer in an all-cash transaction; the complementary nature of GenOn’s and NRG’s generation assets (including diversification by geography and by fuel type); and market power/concentration assessments done with third party experts to consider potential regulatory impediments to transactions with a broad range of industry participants.

On April 13, Edward Muller, GenOn’s Chairman of the Board and CEO, called David Crane, NRG’s President and CEO, and indicated GenOn’s interest in exploring a potential business combination between the two companies. Crane expressed an interest in having such an exploratory discussion, and they agreed to meet in person in mid-May, the GenOn filing said. The filing then laid out a long list of contacts and conversations the companies had over the next few weeks as they worked out the particulars of this merger.

  • For example, on May 22, NRG and GenOn entered into a mutual confidentiality agreement that contained customary standstill as well as confidentiality provisions. The managements of NRG and GenOn then held several discussions regarding certain aspects of the potential transaction and the initial diligence phase, including forward commodity price curves and certain assumptions common to each company’s financial forecasts.
  • On June 14, the NRG Board held a special meeting to discuss the potential business combination with GenOn. At the end of the meeting, the NRG Board authorized NRG management to commence discussions with GenOn regarding exchange ratios and potential governance structure, engage financial advisors for the transaction and commence the preparation of a merger agreement for the potential transaction. Following the June 14 NRG Board meeting, NRG retained Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC as its financial advisors.
  • On June 18, GenOn retained J.P. Morgan Securities LLC as its financial advisor. Also, on June 29, GenOn retained Talisman International (a nuclear consulting firm) to assist in due diligence related to NRG’s ownership the South Texas nuclear plant.
  • On June 25, the NRG Board held a special meeting to discuss the status of the potential transaction. NRG management updated the board on the strategic rationale for the potential business combination with GenOn, anticipated synergies, the status of due diligence, contemplated terms of the proposed merger agreement, required regulatory and stockholder approvals. Upon the conclusion of the meeting, the NRG Board directed management to advance to the next phase of due diligence, which would include legal due diligence as well as further business and financial due diligence and, in the meantime, to commence negotiations regarding the terms of the merger agreement with GenOn, with the goal of reaching a definitive agreement between the two parties on or about July 20.
  • On June 27, NRG sent an initial draft of the merger agreement to GenOn.
  • On June 29, the GenOn Board received an update from senior management of GenOn and representatives from Skadden and J.P. Morgan on the status of the discussions with NRG.
  • On July 11, in a telephone call between officials of both companies, the parties agreed that, immediately following the consummation of the merger, the NRG Board would consist of 16 directors, 12 of whom would be incumbent directors from the NRG Board and four of whom would be current directors from the GenOn Board and that Muller would be vice chairman of the board of directors of the combined company.
  • On July 13, the GenOn Board held a special meeting, with representatives of GenOn management, Skadden and J.P. Morgan present.
  • On July 20, the GenOn Board met at Skadden’s offices in Houston, Texas, to consider the proposed merger. Prior to the meeting, the GenOn Board was provided with a draft of the merger agreement and other materials related to the proposed transaction. After discussing the various aspects of the proposed deal, the GenOn Board unanimously determined that the merger and the other transactions contemplated by the merger agreement were advisable and in the best interests of the GenOn stockholders, and adopted and approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommended that the GenOn stockholders adopt the merger agreement.
  • Later in the afternoon of July 20, the NRG Board held a special meeting. The board then, among other things, approved and declared advisable the merger agreement and related matters.
  • Following the approvals of the NRG Board and the GenOn Board, NRG and GenOn executed the merger agreement. On July 22, NRG and GenOn issued a joint press release announcing execution of the merger agreement.

GenOn outlines the advantages for a merged company

GenOn said in the Oct. 9 filing that it and NRG believe the merger will enhance stockholder value through, among other things, enabling NRG and GenOn to capitalize on the following strategic advantages and opportunities:

  • Diversification and Scale – NRG and GenOn believe the merger will create a combined company with greater scale and scope in energy generation and delivery than could be achieved in the near term by either company on a standalone basis, particularly given the complementary geographic footprints of their generating assets. The combined company is expected to be the largest competitive power generation company in the U.S. with about 47,000 MW of fossil fuel, nuclear, solar and wind capacity across the merit order, located almost entirely in the three premier competitive energy markets in the U.S.
  • Synergies – Although no assurance can be given that any particular level of cost savings or other synergies will be achieved, NRG and GenOn currently expect that the transaction will result in approximately $200m per year in incremental EBITDA and, combined with approximately $100m of balance sheet efficiencies, will result in at least $300m of additional free cash flow by 2014, the first full year of combined operations.
  • Anticipated Financial Strength and Increased Flexibility – NRG and GenOn believe the increased scale and scope of the combined company will strengthen its balance sheet. Balance sheet efficiencies will permit the combined company to reduce indebtedness by at least $1bn, and increased EBITDA and funds from operations are expected to significantly improve key credit metrics. This will enhance the financial stability of the combined company, lower its average cost of debt and enable it to better navigate through industry cycles and commodity price fluctuations.
  • Combination of Complementary Expertise – NRG and GenOn believe the merger combines complementary areas of expertise, including on operational, regulatory and nuclear matters, and the significant prior experience the two companies have had integrating merged businesses.
  • Immediately and Substantially Accretive – The transaction is expected to be immediately accretive on an EBITDA basis and substantially accretive to both EBITDA and free cash flow (before growth investments) in 2014, the first full year of operation after the closing of the transaction.
  • Ability to Participate in Future Growth of the Combined Company – Current NRG and GenOn stockholders are expected to hold about 71% and 29%, respectively, of the combined company’s outstanding common stock. As a result, both NRG and GenOn stockholders can benefit from the synergies expected to be realized from the business combination.
  • Enables Expanded Wholesale-Retail Model – An expanded core generation fleet will enable the combined company to duplicate in multiple markets (principally in the East) the successful integrated wholesale-retail business model NRG currently operates in ERCOT (the electric market operated by the Electric Reliability Council of Texas). NRG and GenOn believe this is the best business model across the price cycle, in an industry that is subject to commodity price volatility.

Upon completion of the merger, assuming no change in the individuals serving as directors and senior management of each company prior to the completion of the merger, the corporate leadership team of the new NRG will include Crane as President and CEO, Kirk Andrews as Chief Financial Officer, Mauricio Gutierrez as Chief Operating Officer and Anne Cleary as Chief Integration Officer. Upon completion of the merger, the executive offices and commercial and financial headquarters for the combined company will be located in Princeton, N.J., and the operations headquarters will be located in Houston.

The stockholders of both companies will hold their respective special meetings to vote on this merger on Nov. 9.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.