Banks financing TXU buyout offer $1bn to get off the hook

Banks financing TXU buyout offer $1bn to get off the hook

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2364532.ece

Siobhan Kennedy
September 1, 2007

The banks that underwrote the $45 billion acquisition of TXU Corp, the world’s biggest buyout, have offered to pay the $1 billion (£495 million) break fee in a desperate attempt to convince the private equity backers to drop their bid.

It is understood that the banks asked Kohlberg Kravis Roberts and TPG to consider withdrawing their offer after the turmoil in the credit markets meant that the banks would have little or no chance of syndicating the record-breaking $37 billion loan to investors. The banks include Goldman Sachs, Morgan Stanley, Citigroup, Lehman Brothers and JPMorgan.

However, KKR and TPG are understood to want to press on with their offer, despite tough market conditions, and are focusing on next Friday, when shareholders are scheduled to vote on the acquisition.

“The decision about paying a break-up fee has nothing to do with the banks. That’s up to the buyers,” one person close to the deal said last night. “And the buyers want to do this deal.”

The banks’ move to quash the deal emphasises the tough circumstances that the world’s biggest financial institutions are facing in the wake of the collapse of the sub-prime mortgage market in America. Several large banks, such as Goldman Sachs, have disclosed investment losses linked to sub-prime, but many believe that the extent of Wall Street’s losses are still unknown.

The TXU deal was agreed in March, at the height of the private equity M&A boom, when banks were competing aggressively to lend on ever-bigger debt multiples. The cash offer was priced at nearly $70 a TXU share. (The shares are trading at about $67.) But since then, the sub-prime crisis has spread rapidly across financial and money markets, sparking panic among investors and causing them to flee risky investments in favour of safe-haven government bonds. In the buyout world, that has left American banks such as Citigroup and JPMorgan holding more than $250 billion of underwritten but unsyndicated debt. in Europe that total is estimated to be about €80 billion (£54 billion).

President Bush sought to calm nerves yesterday by saying that the markets were in a period of transition as participants reassess and reprice risk. “America’s overall economy will remain strong enough to weather any turbulence,” he said.

Ben Bernanke, the Chairman of the US Federal Reserve, pledged that the central bank would “act as needed” to keep the credit crisis from spilling over into the American economy. Some observers believe that Mr Bernanke could soon be forced to cut the Fed’s most important interest rate, now at 5.25 per cent, by at least 0.25 per cent to stave off fears of a recession.

The $45 billion acquisition of TXU is the biggest buyout on record and is one of several mega-deals signed in America this year, including the $24 billion acquisition of the technology services firm First Data and the $23 billion deal to acquire the telecommunications company Alltel.

KKR and TPG’s offer was originally met with scepticism from shareholders and politicians, and, to curry favour, the pair said that they would drop controversial plans to build eight coal-fired power stations if their planned acquisition were successful. TXU had been embroiled in a battle with environmentalists over the use of coal-fired stations since the utility announced a $10 billion building programme last year.

Compounding problems, Franklin Resources, a key investor, which owns 4.8 per cent of the shares, said that it would vote against the deal because the price was too low. In recent weeks, however, the group’s management has been on a roadshow to persuade shareholders to accept the bid. This week Franklin announced that it planned to back the buyout, citing “changing market conditions”.