Environmental Advocates Hire Investment Banker in Energy Deal

In a very interesting turn of events, Environmental Defense, the group that negotiated for some environmental concessions to win its support for the leveraged buyout of TXU, the Texas utility, by Texas Pacific Group and KKR, has engaged boutique investment banking firm Perella Weinberg.

The New York Times, in the story, “,” summarizes the state of play:

One of the nation’s largest and most influential environmental groups, Environmental Defense, has hired Perella Weinberg Partners, the boutique investment bank, to advise it as the group takes on an unusual role in the middle of the $38 billion buyout of TXU, the Texas energy giant.

Two weeks ago, Environmental Defense helped negotiate environmental terms of the buyout deal that the Texas Pacific Group and Kohlberg Kravis Roberts & Company struck with TXU, including concessions to reduce coal-fired plants and carbon emissions limits.

With the addition of Perella Weinberg, Environmental Defense appears to be signaling that it wants an even more powerful seat at the bargaining table with TXU and its suitors….Over the next several weeks, TXU will be seeking higher bids for the company from rival suitors as part of a provision in its deal with Texas Pacific and Kohlberg Kravis that allows it to test the market for better offers.

While Environmental Defense negotiated and blessed that deal, it could switch allegiances to support another set of suitors should one present an even more environmentally friendly plan.

We were skeptical of how genuine Texas Pacific’s and KKR’s intentions really are (see “Green Spin in TXU Buyout Bid“). Cancelling the eight power plants was a pragmatic economic decision; the green spin was gravy. But having not only a seat, but savvy representation at the table, will help keep the successful buyers (whoever they are) honest.

And the arrangement is a for the bankers. Perella Weinberg has a roster of star talent, but to date has few deals closed, so taking a high profile assignment (admittedly for less-than-usual fees) is a smart PR move. Perhaps more importantly, it may represent a new effort by M&A bankers to regain their status as trusted counsel. The widespread use of the auction process initially was a boon to bankers, since the industry had an accepted playbook that brought buyers to a deal on a set schedule, and was effective at garnering top prices. Unfortunately, it also made the mechanics of how to do a deal transparent to corporate buyers, and over time devalued the role of the banker, and also led companies to handle routine transactions on their own.

The deal is likely to be tested on other fronts. As we noted, and the New York Times discusses in a separate story, “,” that what is making this deal environmentally friendly is the cancellation of plans to construct 8 coal fired plants. Unfortunately, Texas needs the energy:

Texas faces a big hole in its electricity production, since the country’s second-most-populous state also happens to be one of the fastest growing because of immigration and the rise in riches from the recent increase in oil and gas prices.

That hole just got bigger as the TXU Corporation, the state’s biggest utility, scrapped plans for eight new coal-fired plants under a deal it has agreed to with potential new owners. The deal has delighted many environmentalists, but it has also stoked one Texas-sized problem.

Unless new generation is built quickly from some source, Texas energy production in 2009 will fall below reserves recommended by the state operator of the power transmission grid for guaranteeing smooth operations during peak periods of high heat.

Sources believe that Texas won’t be able to obtain enough energy to fill the gap from renewable sources soon enough. The most likely near-term candidates are gas and nuclear power.

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