Reliant Joins NRG-Exelon Merger Bermuda Triangle (RRI, NRG, EXC)

Reliant Energy Inc. (NYSE: RRI) is taking a hit this morning.  It wasn’t just the earnings loss, or its plans to sell a unit.  This really appears to be over the ramifications of the long-term aspects colliding with the near term aspects.  The company suddenly finds itself nestled inside this merger fight between NRG Energy, Inc. (NYSE: NRG) and Exelon Corporation (NYSE: EXC).

Reliant reported a fourth quarter EPS loss of $1.25 on net income of $437.7 million. Analysts had been expecting an EPS loss of $0.28. Revenue was $2.58 billion compared with $2.65 billion a year earlier, but still beat predictions of $2.01 billion.

The quarterly loss was attributed to $543 million in impairment charges and derivative losses. The full-year loss amounted to -$739.7 million (EPS loss of -$2.13), while revenue reached $12.55 billion, up from $11.21 billion in 2007.

Reliant also announced that it is selling its Texas retail business to NRG Energy, Inc. (NYSE:NRG) for $287.5 million in cash. That’s about a quarter of Reliant’s market cap at current share prices. Reliant will also get a new name when the deal closes, which may occur in the second quarter of 2009.

An added wrinkle in this transaction, of course, is the hostile bid for NRG from Exelon Corporation (NYSE:EXC). Exelon’s all-stock, $6.2 billion offer for NRG has just received tenders from more than 51% of NRG shareholders.

Exelon has released a statement today that it is “evaluating” NRG’s acquisition of Reliant. According to Exelon, “NRG hasn’t provided enough information about its deal with Reliant to enable us to make an informed judgment about the impact of that deal on Exelon’s pending offer to acquire NRG and the resultant impact on the value our deal creates for shareholders.”

The big question, of course, is whether Reliant adds value to NRG. The bigger question is whether or not Exelon would be willing to boost its offer for NRG based on the Reliant acquisition. That’s certainly what NRG seems to be banking on. But to Exelon the Reliant/NRG deal “reinforces the need for due diligence.” No kidding.

Reliant’s retail segment lost $91 million in the fourth quarter and $789 million for all of 2008. Losses on derivatives accounts for all or nearly all of the poor performance. NRG could be getting a steal here, but Exelon may have to buy a pig-in-a-poke unless NRG agrees to mutual due diligence with Exelon.

NRG shares are off about 2.5% this morning, Reliant shares are off around 8%, and Exelon shares are nearly flat.

Paul Ausick
March 2, 2009