Update: Reliant: Waiting for the other shoe

It’s been a week since Reliant Energy said it was seeking “strategic alternatives,” i.e. selling all or part of its business. Since then the company has been silent (as it said it would be) with the exception of a release this morning saying it has finalized its $350 million equity investment from First Reserve.
In the information vacuum one is left to wonder about when the other shoe, i.e. announcement of a buyer or some new financing, will drop. The stock was hammered last week, dropping 41 percent to close at $3.07 Friday (but it opened today in the $5 range), a drop that sometimes triggers troubling clauses in credit agreements. But analysts say the company told them no such triggers are there, so something drastic, like bankruptcy, is unlikely.
So, who might consider buying all or part of Reliant? MergerMarket.com, an independent merger analysis firm, put out a note over the weekend with some thoughts:

“Reliant Energy (NYSE:RRI), the Houston-based electric company, could see interest from foreign companies, independent power producers, or private equity and infrastructure firms, industry sources said. Individual assets may also receive interest, but given current market conditions, it may not see offers high enough to satisfy shareholders.”

The report says because of Reliant’s liquidity problems it should consider merging with a larger company, like NRG (which actually owns the Houston-area power plants that Reliant retail buys power from) or Exelon, or a foreign firm that’s heavily invested in coal, like the U.K.’s Centrica. But given the heavy baggage that comes with coal these days (think pending carbon legislation and the unknown outcome of the U.S. elections) such players might be less willing to jump in now, the report says.

“It therefore may be more likely to see offers from infrastructure or private equity firms, as they have a longer view on the markets and make acquisitions regardless of politics. Such firms could include ArcLight Capital and Luminus Group, who have an interest in the energy industry, the analyst added.”

It’s interesting the MergerMarket report mentions Centrica, which is also the parent company of Direct Energy, one of the state’s largest electric retailers. Selling Reliant’s retail business outright would be a challenge given the riskiness of the business in Texas right now and the size of that business unit, but it’s possible Direct would be in a better position than most to handle it.
Centrica’s not the only foreign utility that may be a good fit for Reliant. French utility EDF was recently rebuffed in its efforts to buy another large power retailer/wholesaler, Constellation Energy. It also just acquired a footprint in Houston when it bought Eagle Energy Partners, the energy trading and marketing firm from Lehman Brothers.
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Reliant ended the day with one of the market’s best performances, up nearly 90 percent to $5.82. The overall market was up, which no doubt was a major factor, but closing the previously-announced $350 million deal with First Reserve may have helped.

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