SAN FRANCISCO -(Dow Jones)- The $10.7 billion bid by NRG Energy Inc. (NYSE:NRG) (NRG) to merge with fellow independent power producer Calpine Corp. (NYSE:CPN) (CPN) could signal a reopening of mergers and acquisitions in the sector, analysts at Standard & Poor's said Thursday.
"It has been evident for some time that consolidation in the industry was likely as some players moved to harness economies of scale and generation fleets," the analysts wrote in a report on the merchant power sector.
The companies disclosed Wednesday that NRG made a stock-for-stock bid for Calpine May 14, offering 0.534 share of its stock for each share of Calpine. Calpine, based in Houston and San Jose, Calif., has not responded to the proposal.
The combined company would be the largest merchant generator in the U.S., with 45,000 megawatts of power generating capacity and a market capitalization of about $22 billion. The consolidation of assets would be felt most acutely in Texas, where NRG generates 14,000 of its 23,000 megawatts of capacity nationwide, and in California, where the majority of Calpine's 23,800 megawatts of gas-fired and geothermal generation is located.
Princeton, N.J.-based NRG's overtures to Calpine could be the first in a wave of mergers and asset acquisitions. Independent power generators have been eyeing consolidation for some time, but have been kept back by the credit crunch, said analysts at S&P. But with electricity prices set to rise, against the backdrop of growing demand and slow growth of new generation capacity, power producers are in a good position to see their revenues rise and this could fuel consolidation in the industry, S&P suggested.
"The (NRG) offer indicates that sector participants believe that the fundamental improvement in merchant power markets is here for the medium term," S&P said.
A reluctance to build new coal plants over concerns about pending federal legislation that would limit greenhouse gas emissions, and an inability of current power prices to cover the rising costs of new power plant development, has resulted in fewer new power plants built in the last three years, S&P said.
Financial performance at Dynegy Inc. (NYSE:DYN) (DYN) and Reliant Energy (NYSE:RRI) (RRI), both based in Houston, has continued to improve, while Atlanta-based Mirant Corp. (NYSE:MIR) ( MIR) has continued returning large cash balances to shareholders through stock buybacks, S&P said.
One or more of those companies could be a possible merger or acquisition target in the event of broad independent power sector consolidation.
-By Cassandra Sweet, Dow Jones Newswires; 415-439-6468; cassandra.sweet@ dowjones.com
(END) Dow Jones Newswires 05-22-08 2151 Copyright (c) 2008 Dow Jones & Company, Inc.
