WHY BUY TXU?

Someone asked me why TXU might be bought out, so here goes . . . .

TXU may be bought by a consortium of Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG). Both are private equity firms that use leveraged buyouts, and TPG specializes in rapid turnarounds and recapitalizations.

Although there have been various target purchase prices quoted in the various news medias, the price of about $44 billion seems to be the most plausible, at least it is what Reuters is reporting.

KKR was founded by Jerome Kohlberg, Jr, and his two cousins Henry Karvis and George R. Roberts in NY in 1976. TPG was founded by David Bonderman, James Coulter, and William S. Price III in 1992 in Fort Worth. Bonderman was associated with Henry Bass as a Chief Operating Officer prior to TPG. Notably, Kohlberg, Bonderman, and Coulter have contributed (2006, for example) to various Democratic efforts locally and nationally. Kravis donated to Republicans and Joe Lieberman.

TXU has entered into a new phase of operations. For example, in 2006 their operating costs have risen by 46% while their income profit has risen only 35%. Based on their Sept 30, 2006 reports, their total assets are $25 billion but their Net liabilities are $23 billion, leaving a tangible asset of just shy of $1 billion. For those who are interested, in January 2000 TXU stock price was about $18 per share and has risen to about $60 per share by February 2007.

For an explanation of why these groups might want to buy TXU a possible analogy can be drawn from what has transpired with Arlington Telecable. The cable system in Arlington has changed hands several times in recent years, with each buyer using a leveraged buying system that incurred increased debts -- costs passed onto customers with each new owner. The current owner of Arlington Telecable is Comcast. In leveraged buying, the most common practice is to establish numerous loans from several financial institutions, frequently using current assets of the targeted company as collateral.

The buyout offer would only be likely to occur when Austin removed the encumbrance -- such as it was -- of the Public Utility Commission (ending 12/31/06 I believe). This permits there to be no oversight over any utility company in the state, placing them into a free market posture. Fluctuations would be driven by demand of the product provided and by the competition of other similar providers. In the Conservative Ideology, such competition should tend to drive prices downward; however, such frequently does not always occur, especially when the number of competitors are significantly reduced (for example, the effect of WalMart on local pre-existing stores, which tends to drive the price upwards locally while still highlighting spot product at cost or below cost rates to entice customers once local competition has been dissolved).

The new bankruptcy laws allow for corporations to dodge many old debts -- like employee retirement funds. (Personal bankruptcy , however, is more difficult to pursue and you would still likely retain old debts.)

A very possible scenario might entail some future date for TXU to be declared bankrupt, especially if the holding company had amassed large debts to secure TXU, allowing employee pensions to be lost -- like Enron. However, since TPG especially initiates resales rather rapidly,a process similar to Arlington Telecable might be also possible, with succeeding companies buying it and incurring more loan debt at each new acquisition. When and if these increased debts would no longer be borne by the customers (by going to alternative suppliers), a bankruptcy would be very likely.

TXU has amassed a large amount of public relation negativity -- especially over the possible 19 new coal fire power plants -- which can not be quantitatively measured as to its long term impact; however, TXU has also warned that rolling blackouts and complete blackouts are to be expected in the near future if these power plants are not built. As seen in California, rolling blackouts can be manufactured at will and without justification of equipment failure or high demand. The citizens of California paid tremendously high taxes to get the blackouts stopped.

TXU has already begun a process of trying to hold customers into a period contract relation -- for example, a $25 instant refund on your next bill if you agree to a 24 month period of fixed prices. TXU has numerous other plans, but all seem to tend toward the holding the customer into a long term contract situation. Their expectation might be that within two years, they will be able to crush the competition and then freely float the rates they charge. (A similar situation happened when the telecommunication corporations were allowed free market status -- going from numerous providers to a very few survivors, mainly those with vast assets before the competition began.)

In previous years TXU has experimented somewhat in overseas operations, for example Royal Scotland Light and Power,which had substantial oil reserves based in the North Sea. However, the management and productivity and profit were so poor that the investment was dumped at a loss.

Both a hostile takeover or a buyout remain very possible. It could result in a relatively quick profit for some people while leaving an increasing debt burden on investors and customers.

Now some Representatives in Austin are beginning to get nervous. KKR and TPG will not agree to limiting the number of new coal powered factories or decreasing pollution emmissions, nor to holding TXU (which will be split into three separate companies) for longer than five years. Add to this that hours before the announcement of the deal, the exercise of options spiked 150%, causing the SEC to consider and investigation of insider trading.

TXU, KKR, and TPG announced that eventually local customers would have a decrease of between 8 and 10% in their kilowatt /hour rate. However, with reporting their $2+ Billion profit for the last quarter, some Representatives in Austin are pointing out that TXU would still have higher rates than many of its current competitors even with the deduction.

As I said, some will get richer, but not the customers.