Energy Capital, Investors to Buy Calpine for $5.6 Billion

(Bloomberg) -- Private equity firm Energy Capital Partners and a consortium of investors struck a deal to buy U.S. power generator Calpine Corp. for $5.6 billion in cash.

Calpine investors will get $15.25 a share, the Houston-based company said in a statement on Friday, 13 percent more than Thursday’s closing price. Including debt, the deal is valued at more than $17 billion. The investor group includes Access Industries and Canada Pension Plan Investment Board. Shares of Calpine jumped to the highest in more than a year.

Power generators that sell supplies directly into wholesale markets like Calpine have seen their margins squeezed by cheap natural gas, a surge in renewable energy and subsidies for nuclear reactors in some states. The rout has touched off a wave of consolidation and plant sales with companies including FirstEnergy Corp. and American Electric Power Co. looking to get out of the business altogether.

Energy Capital, Investors to Buy Calpine for $5.6 Billion

“Calpine is the premier power generator,” Timothy Winter, a St. Louis-based analyst for Gabelli & Co. who rates Calpine a buy, said Friday by phone. “The market doesn’t appreciate the story. It doesn’t appreciate the whole independent power producer business. It seems like private equity does.”

Shares jumped as much as 9.6 percent to $14.80, the highest since July 2016. They were at $14.78 as of 9:54 a.m. in New York. The deal is expected to close in the first quarter of 2018, pending approval from shareholders and regulators.

Boost Footprint

Calpine will “continue to strengthen our wholesale power generation footprint, while benefiting from ECP’s support, industry expertise and long-term investment horizon,” Thad Hill, the company’s chief executive officer, said in the statement.

The Energy Capital deal includes a 45-day “go-shop” period, during which Calpine can solicit other offers. The investor consortium will receive a $142 million fee if the agreement is terminated for a better proposal, unless Calpine terminates the deal for another offer “from certain exempted persons” before the 106th day after the agreement. In that case, the termination fee will be $65 million.

“We don’t think it is likely there is a topping bid,” Greg Gordon, an analyst at Evercore ISI, wrote in a note on Friday. “It was probably very hard to pull together an equity consortium for this size of a deal and it was a competitive process.”

Debt Reduction

Tyler Reeder, a partner at Energy Capital, said the firm doesn’t expect to make any changes to the way Calpine operates or to the company’s financial policy and previously announced $2.7 billion debt reduction plan.

Energy Capital has become one of the most active private equity investors in the U.S. power sector. It formed a joint venture last year with Dynegy Inc. to buy Engie SA’s U.S. power portfolio for $3.3 billion and agreed to sell its stake in that joint venture to Dynegy before the deal closed. The investor was Dynegy’s largest stakeholder as of June, based on data compiled by Bloomberg.

Energy Capital also bought a natural gas plant from Calpine in South Carolina in 2012 for more than $400 million. Calpine owns 80 power plants and has about 6.5 million retail customers in California, Texas and the U.S. Northeast. Calpine’s headquarters will remain in Houston, and the current management team is expected to stay in place.

In addition to selling electricity, Calpine gets payments from power grid operators for guaranteeing future capacity when they need it. In one capacity auction in May, Calpine cleared 5.3 gigawatts for a total of about $326 million in capacity revenue for the year starting June 2020.

Lazard Ltd. is serving as Calpine’s financial adviser, while White & Case LLP is the company’s legal adviser. Barclays Capital Inc. and Latham & Watkins LLP are advising Energy Capital.