A Texas-sized bankruptcy for giant Texas energy deal
Texas was dealt a blow by the U.S. Supreme Court Tuesday, via a ruling that the Environmental Protection Agency can order states to cut down on emissions if those emissions are drifting over to neighboring states.
Texas has the highest CO2 emissions of any state in the country. Texas also consumes the most energy, which brings us to the second major blow dealt to Texas: The state’s largest electricity provider, Energy Future Holdings Corp., filed for bankruptcy.
In 2007, Goldman Sachs and private equity firms acquired TXU for $45 billion, making it the biggest leveraged buyout ever. There were lots of reasons to believe that owning the largest provider of electricity in the largest state in the continental U.S. had lots of potential for growth, so private equity firms loaded the company — renamed “Energy Future” — with debt.
“The problems, of course, are when the business becomes less valuable, or there are meaningful hiccups,” says Peter Cowan, managing director of Clear Capital Advisors.
Those meaningful hiccups can be caused by a larger economic downturn, or from changes within the industry. In this case it was both. The 2008 recession caused an overall decline in energy use. And then came the fracking boom, which drove the price of natural gas down, along with the utility’s profits. When Energy Future filed for bankruptcy today, its total assets were $36.4 billion. Its debt was nearly $50 billion.
Barbarians at the Gate and the other largest LBO that you might have heard of
by Tobin Low
It was the largest buyout in U.S. history. At the time, the 2007 purchase of Energy Future Holdings for $45 billion was called that.
But credited with creating the LBO environment of the next 20 years, the 1989 purchase of Nabisco was both contentious and dramatic. The food company sold for $31.1 billion at the time, and when adjusted for inflation, the sale price is closer to $55.38 billion. With the adjusted price of Energy Future coming in at around $47.23 billion, Nabisco’s sale wins by almost $7 billion.
Plus, as dramatic as Energy Future’s end may be, Nabisco’s LBO started out with a bidding war that has since been immortalized in book and on screen. F. Ross Johnson, then executive of the company, partnered with with a buyout firm to attempt an in-house purchase of the company. Enter Kohlberg, Kravis, Roberts & Company (also involved in Energy Future’s purchase). KKR started a bidding war that continued to hike the price of Nabisco higher and higher. At the end of the day, Johnson lost out, and ultimately left the company.
To this day, it is still considered to be “one of the most game-changing deal in American financial history.”
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