Takeaways from the TXU Buyout

Given that a $45-billion sale of TXU to private equity firms Texas Pacific and KKR is apparently a done deal, it’s worth thinking about some of the consequences. For starters, while this is a big deal, it isn’t yet the largest in history. That honor still sits with KKR’s 1988 deal for RJR Nabisco. Inflated to today’s dollars, the then-$25-billion deal becomes a  $63.2-billion deal.

And that raises an interesting question. Given that there is far more private equity under management today than there was in 1988, and that the appetite in debt markets remains unabated for leveraging these things, it seems inevitable that we will surpass RJR Nabisco in deal size.

So, who does that bring into play? Well there are 80 or so U.S.-listed companies with market capitalizations between $45-billion and $100-billion. The names include Apple, Dell, Oracle, Kraft, Ebay, Lowe’s, Target, and Time-Warner, among many others. The better question might be, Who’s not in play when you get up into these kinds of numbers?


  1. KKR certainly has no problems with the companies they purchase having negative public images. The corporate villains of the ’80s were the tobacco companies, and the villains of today are energy companies. I live in Dallas-Fort Worth, the heart of TXU’s operating area, and they have been under fire for doubling their rates over the past 4 years (causing their customer base to drop by 1/3 over that span) as well as for announcing their intention to build 11 new coal-fired generating facilities (they’re gouging the consumer AND destroying the earth – a Texas two-step of corporate malfeasance!). The KKR-led group (let’s not forget their partner Texas Pacific Group, no stranger to the splashy deal over the past few years) is already out in front of these, with indications that they intend to lower rates and only build 4 new coal-fired plants. Smart people.

  2. Sort of surprised we haven’t seen Chrysler mentioned as a private equity target.

  3. You make a very good point Paul, the implications of this are downright scary!
    We also just wrote a report on the move in TXU and XLU from a technical analysis perspective for those who are interested at http://blog.successfulonlinetrading.com/
    In retrospect the action in the XLU chart sure saw this move coming…

  4. Franklin Stubbs says:

    Apart from the ‘global liquidity glut,’ maybe we are in the throes of a major transition here in terms of how capitalism works.
    Bottom line: public shareholders are crappy disciplinarians. Too divided with too little influence, resulting in a free pass for lazy / ineffectual / inefficient management.
    Private equity guys, on the other hand, are ruthlessly focused on the bottom line. They hold the whip hand when it comes to management.
    Put two and two together. If the job of the capital markets is to allocate capital efficiently, maybe a large-scale transition of ownership from public ownership to motivated private ownership makes sense.
    One could argue that PE guys are gaming the system and using funny money to engineer these megacoups. But, on the other hand, one could also argue their efficiency in gaming the system is testament to the fact that they are effective at getting things done… whereas shareholders, otherwise deaf, blind and mute, simply aren’t.
    All hail Gordon Gekko. Welcome to a brave new world of benign dictatorship. I for one welcome my new masters with open arms.

  5. So on one hand we have the ‘global liquidity gut’ as “Franklin Stubbs” mentions above. On the other hand, we have the increasingly stifling Sarbox regs and other public company restrictions. Both increase the appeal and viability of private equity (the liquidity gut means they can borrow lots of money at low rates and with little oversight, and Sarbox means they can operate more efficiently).
    But. Private equity is not an end in itself the way the public markets are. Private equity needs an exit to the public markets in order to get its (hopefully extraordinary) return. So the ‘value creation’ logic is ultimately circular. Which should mean that this is just yet another bubble that will either burst (via a sharp raise of interest rates or some other shock) or slowly unwind as LPs realize that the eventual liquidity events aren’t leading to the higher returns that they expected.
    We seem to already be seeing a bubble peak of sorts with hedge funds, where most are underperforming standard indexes. And hedge funds at least *can* be their own endgame since they are primarily in the public markets from the start. So it seems to me that it is more a question of ‘when’ than ‘if’ the buyout trend will reverse.
    Of course, maybe there really is huge value locked up on many public companies that can be accessed only via a public->private->public process. Or maybe everyone will end up going back out on some new market somewhere else in the world where compliance costs are low enough that it will all have been worth it for that.

  6. er, I meant ‘global liquidity glut’ of course, not ‘gut’. Although ‘global liquidity gut’ has some nice imagery.

  7. scott gates says:

    not sure this deal gets done. Seems to me KKR has played a good game, scrapping some 8 coal fired plants to make a LBO deal work and making it look like an appeasment to the enviromentalists in Austin. But this allows a lower hurdle rate of return w/upside of higher prices for power to texans down the road………win win. But i dont think texans are beginning to smell a rat. There is a reason they need 10 new power plants.