Environmentalists try on new role in buyouts

WASHINGTON — The role environmentalists were asked to play in a $32 billion private-equity buyout of a large Texas coal burner could serve as a model for takeovers in other polluting industries, experts said Monday.

Dealing with the concerns of environmentalists "in a responsible way, up front, can save many years of litigation," said Stephen Humes, an energy and environmental lawyer with McCarter & English in Hartford, Conn.

And such collaboration makes economic sense for mergers and acquisitions beyond the energy sector — in particular, for potential deals involving chemicals and auto makers, said Paul Portney, dean of the University of Arizona's Eller College of Management.

Dallas-based TXU said Monday it agreed to be sold for $69.25 per share to a group of private-equity firms led by Kohlberg Kravis Roberts (KKR) and Texas Pacific Group.

The two environmental groups that blessed the acquisition of TXU — Environmental Defense and the Natural Resources Defense Council — said eco-friendly provisions in the deal signal a major change in the way Wall Street views the financial risks of global warming.

In addition to publicly supporting the deal, and highlighting TXU's pledge to support global-warming legislation, Environmental Defense plans to drop a federal lawsuit against the company.

"While this earthquake took place in Texas, the reverberations are going to be felt from Wall Street to Washington, and it's about time," said David Hawkins, director of the climate center at the Natural Resources Defense Council.

Consumer advocates remained skeptical about the broader implications, however.

Despite TXU's decision to scale back plans to construct 11 new coal-fired power plants — a major source of carbon dioxide and other atmospheric heat-trapping gases — critics noted that competitors were likely to fill the void. They also warned that private ownership of TXU could reduce public oversight of the company.

Tom Smith, director of consumer group Public Citizen's Texas office, said other companies will likely be eager to propose new coal plants. "The coal wars are far from over," he said.

Mark Cooper, research director at the Consumer Federation of America, said the deal exposes consumers to a "grave risk" because a privately owned TXU will be outside much state and federal regulation.

"This utility will be regulated by no one," Cooper said.

The University of Arizona's Portney said the private equity groups' eagerness to collaborate with environmentalists is quite simple to understand: "If they're going to own a company, they don't want to be at war with environmental advocates at the same time that they're trying to overhaul the management of the company and fix it up" for an eventual sale.

While private equity firms have a reputation as investors looking for a quick exit, in this case they were able to reorient the company's strategy for the long term, said Bob Profusek, co-director of the mergers and acquisitions practice at law firm Jones Day in New York.

"It shows the flexibility that the private equity community has," Profusek said. "It's very difficult to change strategy or to do anything that might impact short-term results if you're public."