Eco-Warriors at the Gate

Does the record-breaking purchase of TXU signal a new strategy for private equity?

Another week, another record-breaking private-equity deal. But the $45 billion purchase of TXU, a Texan energy utility, is fascinating not just because of the high price agreed by a gang of private-equity firms led by Kohlberg Kravis Roberts (KKR) and Texas Pacific Group. The preparation of the deal was as much about politics as the number-crunching and financial alchemy that are private equity’s stock in trade. In essence, the buyers are betting that the increasingly sensitive question of how to produce energy in an environmentally acceptable way is better handled by a privately owned firm than by one exposed to the public markets.

In recent months TXU has become the bogeyman of green activists, thanks to its plans to build 11 old-tech, “dirty coal” power plants in Texas — and possibly more in several other states. Such plants belch carbon dioxide into the atmosphere, contributing to global warming, and produce other noxious substances. Protesters demonstrated last month outside the capitol building in Austin. The mayor of Dallas has led a coalition of Texas cities opposed to the new coal plants. And the governor of Texas, Rick Perry, was roundly criticised for trying to speed through the construction of TXU’s coal plants, before being blocked by a state judge.

The new private-equity owners of TXU say they will adopt a radically different approach. Capitalism’s legendary “Barbarians at the Gate”, made infamous by KKR’s acquisition of RJR Nabisco in 1989, have become a bunch of tree-huggers. They will cut the number of new coal plants to three and abandon thoughts of similar plants elsewhere. They will invest heavily in new clean-energy technologies. And they promise to put environmental stewardship at the heart of TXU’s culture, under the guidance of William Reilly, a former chairman of WWF, a green lobby group. That comes naturally, you understand, to a board member of WWF like David Bonderman, co-founder of Texas Pacific.


Environmental Defence, another lobby group, which had been suing TXU, greeted the new strategy as a “watershed moment in America’s fight against global warming.” Although campaigns against the three remaining plants will continue, many of TXU’s critics have concurred. Such is the reward for a huge amount of behind-the-scenes work led by Mr Reilly, who is admired by green activists for his efforts to improve America’s Clean Air act while serving in the administration of George Bush senior.

Texan politicians were also lobbied by Don Evans, a former commerce secretary, and James Baker, a former secretary of state, both of whom will serve on TXU’s new board. Mr Baker will be chairman, which should take the heat off TXU’s chief executive, John Wilder, who will remain in his post. All this is faintly humiliating for Mr Wilder, who must renounce a strategy he vigorously advocated (though he will be well paid for it). The new owners want him working for them, since he is an “excellent operations guy”.

The Texas state legislature is threatening to block the deal, even though that is strictly beyond its power. Locals gripe that since the state deregulated its electricity market five years ago, rates have risen fast. The buyers have already promised a 10 percent rate cut for some customers, at a cost of $300m, but some lawmakers want more.


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