Opposing camps weigh in on NRG's all-stock bid for Calpine

By Paul A. Harris

St. Louis, May 26 - Shares of San Jose, Calif., independent power producer Calpine Corp. (NYSE: CPN) closed the Friday session unchanged at $23.00 as two sides emerged in a dispute as to whether NRG Energy Inc.'s offer for the company represents a fair value.

On May 14 NRG proposed to acquire Calpine in an all-stock deal which would see NRG paying 0.534 of a share of its stock in exchange for one share of Calpine.

Based on Friday's $40 closing price for NRG (NYSE: NRG) the bid would represent a cash equivalent of $21.36 per share.

The most visible of the proponents is Calpine's biggest shareholder, Harbinger Capital Partners, which, in a Wednesday letter to the Calpine board, disclosed that Harbinger has stake in Calpine of between 24% and 25%.

On Thursday opposition to the deal surfaced in the form of a blog titled "NRG's Attempt to Steal Calpine," posted by Kinnaras Capital Management, a hedge fund that is long Calpine.

A serviceable number

In its publicly disclosed letter, Harbinger said of the NRG bid: "We believe this offer represents a good starting point."

However Kinnaras, in its Thursday blog, hazards a guess that Harbinger's finish line could be just about anywhere north of $23.88 per share.

That is the exercise price of Calpine warrants which Harbinger holds, and which are set to expire on Aug. 25 of this year.

Harbinger disclosed its ownership of those warrants in a Form 3 filed with the Securities and Exchange Commission on Feb. 11, 2008, less than two weeks after Calpine emerged from Chapter 11 bankruptcy.

In its Wednesday letter to the Calpine board Harbinger expressed its belief that it is the largest holder of those warrants.

Meanwhile Kinnaras believes that a fairer price for Calpine stock would be in the mid-$30s.

Fiduciary duty

Near the close of its Wednesday letter Harbinger stated "we believe the board, in the exercise of its fiduciary duties, must now make the full terms of the offer public so that all shareholders can express their opinions to the board."

In its Thursday blog, meanwhile, Kinnaras asserted that Calpine's board "made a serious mistake" by squelching news of the offer for a week.

"...The board should have immediately notified shareholders when the offer was made on May 14, rather than be upstaged by Harbinger," Kinnaras asserted.

Upstaged or not, one special situations equities analyst told Prospect News on Friday that on May 13 Calpine shares closed at $19.81. Then on May 14 they closed $0.59 higher at $20.40 per share. The following day they closed at $20.74.

And on May 16 - five days prior to the Harbinger letter - the shares were up to $21.33.

"You gotta think some people knew about this offer," the analyst said, adding that more recent trading in the stock could be pointing to the expectation that NRG will ultimately sweeten the deal.

Price tag

Harbinger stated in its letter to the Calpine board that it had "yet to identify anything objectionable about the [NRG stock-for-stock] offer that cannot be resolved through negotiation.

"We note that the current trading price of Calpine before the premium to be paid by NRG is itself already more than 20% greater than the value that many board members supported only last fall as the value of the common stock in the bankruptcy proceedings.

"Clearly, more than anyone else, the board members who several months ago believed Calpine's stock was worth $17.36 a share are in a position to appreciate the value creation for Calpine shareholders that the NRG offer represents."

Kinnaras, however, disagrees.

Among its assertions: the weighted average age of the Calpine's power plants is under 10 years, while some of NRG's plants are over 35 years old, and Calpine, whose power generation is mostly produced with natural gas, is better suited to operate on an environmental landscape that would tax greenhouse emissions.

Kinnaras concludes that independent power producers with high debt loads such as Dynegy Inc. and Mirant Corp. trade for 17- to 18-times EV/EBITDA, which is where Calpine currently stands based on its last 12 months adjusted EBITDA.

"However, Calpine is poised to increase EBITDA by 25% if not more.

"Assuming shareholders hold out for the next 12 months, shares in Calpine could be valued at $35 per share."

Elsewhere in the independent power producer space shares of Dynegy (NYSE: DYN) closed 2.59% lower, down $0.25, at $9.39.

Shares of Mirant (NYSE: MIR) ended 2.05% lower at $40.69, having given up $0.85 on the day.

NRG's closing price of $40 per share represented a 0.87%, or $0.35, decline on the day.

The pre-Memorial Day Friday found the major U.S. exchanges in retreat.

The S&P 500 fell by 1.32%, or 18.42 points, to close at 1,375.93.

The Dow Jones Industrial Average closed 1.16%, or 145.99 points, lower, ending at 12,479.63.

The Nasdaq ended 0.81% lower, down 19.91 points, to close at 2,444.67.

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