Calpine rejects NRG bid but remains open to discussions; Catalina to acquire Quanta for $197 million

By Paul A. Harris

St. Louis, May 30 - Shares of Calpine Corp. and NRG Energy Inc. both rose in trading Friday as Calpine's board unanimously rejected NRG's all-stock bid to acquire the company.

But market participants said the story is not over yet.

Calpine's board stated in a press release that NRG's offer of 0.534 shares of its stock in exchange for one share of Calpine "is inadequate and materially undervalues [Calpine's] unique asset portfolio and future prospects."

However Calpine left the door open to further negotiations.

The board authorized its advisors to contact NRG to ascertain whether there is a basis for discussions between the two companies to explore a business combination.

NRG president and CEO, David Crane, subsequently stated: "We respect the Calpine board's decision but are disappointed that they have decided not to move quickly to deliver the benefits of our proposal to Calpine's shareholders.

"We continue to believe that our proposal offers significant strategic and financial benefits and we remain interested in a combination with Calpine on the terms we have proposed."

In Harbinger's court

A special situations equities analyst called the Friday exchange between Calpine and NRG "a familiar dance," and added that it is likely to continue.

"This acquisition still makes sense for NRG, even at a higher price," said the analyst, who expects NRG's bid to go up by at least 10%.

Meanwhile a market source who is following the situation, and who agreed to speak on background, reckoned that as a result of Friday's back-and-forth between Calpine and NRG the ball might actually have landed in the court of Calpine's biggest shareholder, Harbinger Capital Partners, with a stake in Calpine of between 24% and 25%.

In a recent letter, Harbinger said of the NRG bid: "We believe [NRG's offer] represents a good starting point."

On Friday NRG (NYSE: NRG) shares gained 1.91%, or $0.78 per share, to close at $41.59.

Calpine (NYSE: CPN) shares gained 0.93% to finish at $22.90, up $0.21 on the day.

The special situations equities analyst was not surprised that the Calpine announcement failed to generate a sell off in the shares because Calpine shareholders expect NRG to return with a sweeter deal.

Calculating from NRG's 0.534 offer, Calpine shareholders would have received $22.21 per share had the merger been transacted based on NRG's Friday close.

Harbinger, which earlier specified that the NRG offer represented "a good starting point," holds Calpine warrants with an exercise price of $23.88 per share, and which are set to expire on Aug. 25.

In a May 22 blog titled "NRG's Attempt to Steal Calpine," posted by Kinnaras Capital Management, a hedge fund that is long Calpine, Kinnaras reckoned that Harbinger, which believes itself to be the largest holder of the above-mentioned Calpine warrants, would be amenable to an offer which topped that $23.88 per share exercise price. Kinnaras believes a fairer price for Calpine shares would actually be in the mid-$30s.

Were NRG to sweeten the deal by another 10%, which the special situations analyst believes is the minimum increase of any revised bid, the price, again based on Friday's NRG close, would be $24.43, $0.55 north of the exercise price of those Calpine warrants which Harbinger holds.

Catalina to acquire Quanta

Elsewhere Friday, Quanta Capital Holdings Ltd. announced that it has entered into a definitive amalgamation agreement with Catalina Holdings (Bermuda) Ltd. and Catalina Alpha Ltd. in which Catalina will acquire Quanta in a transaction valued at approximately $197 million.

At the closing of the proposed deal, Quanta shareholders will receive $2.80 per share in cash, which represents a 55% premium to the volume-weighted average sale price per share over the 30 calendar days ending May 29.

The deal is subject to customary closing conditions, including the approval of Quanta shareholders, and is expected to close in the last quarter of 2008.

James J. Ritchie, Quanta's chairman of the board, said: "We are very pleased to announce this potential transaction, which, when combined with the $1.75 cash dividend per share the board of directors declared in March 2008, would enable us to return $4.55 per share to our shareholders during 2008. This represents approximately 91% of Quanta's December 31, 2007 book value, and approximately 95% of Quanta's book value on September 30, 2006, shortly after we placed it into run-off."

Quanta Capital Holdings is a Bermuda holding company with interests in specialty insurance and reinsurance.

Catalina Holdings, also a Bermuda company, specializes in the acquisition and management of non-life insurance and reinsurance companies and portfolios in run-off.

On Friday's news Quanta (Nasdaq: QNTA) shares gained 38.3%, or $0.72, to close at $2.60, $0.20 below Catalina's bid price.

Friday's situations unfolded against a backdrop of mixed performances among the three major U.S. stock indexes.

Among them, the Nasdaq emerged as the Friday outperformer, moving up 0.57%, or 14.34 points, to close at 2,522.66.

The S&P 500 eked out a 0.15% gain, ending the session at 1,400.38, up 2.12.

However the Dow Jones Industrial Average lost ground, closing 0.06% lower at 12,638.32, off 7.9 points on the day.

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