Utilities Gone Gladiator (EXC, NRG)

On Monday, NRG Energy (NYSE:NRG) management rejected an unsolicited buyout offer from Exelon (NYSE:EXC) that would have exchanged one share of NRG for 0.485 shares of Exelon. Exelon probably didn’t expect a different result because it was ready with an exchange offer directly to NRG shareholders.

Exelon has now made the same offer to NRG shareholders, and filed suitin Delaware alleging NRG breached its fiduciary duty to shareholdersand seeks an injunction to prevent NRG’s board from taking action tosquash the exchange offer.

NRG responded within hours, releasing the contents of a letter to thecompany from Exelon that Exelon had not revealed in its own pressrelease. In that letter, Exelon stated that it would introduce aproposal at the NRG annual meeting in May 2009 to double the size ofNRG’s board, filling the new seats with directors nominated by Exelon.

According to Exelon, NRG’s articles of incorporation allows for theexpansion of NRG’s board by action of the stockholders and the fillingof the new seats by stockholders. Exelon has given NRG until November18th to respond to this claim. If NRG does not respond, Excelon will"assume NRG does intend to contest Exelon’s right to take such actionand that a dispute exists between the parties."

NRG, in its letter to stockholders, advised against taking any actionuntil the exchange offer is reviewed by the company’s board.

Because the exchange offer is identical with the offer NRG’s boardalready rejected, that advice is useless. NRG has about 233 millionshares outstanding. About half those shares are held by teninstitutional investors and ten mutual funds. That’s not a lot ofshareholders to persuade.

Exelon made its original offer on October 19th, at a premium of about35% to the closing price of NRG shares on October 17th. That doesn’tseem to undervalue NRG.

NRG shares gained just under 1% after hours yesterday, while Exelon pulled back by an equal amount.

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Paul Ausick
November 12, 2008