Monday, February 26, 2007

TXU to Join PEU (Private Equity Underwriters)

Yet another American corporate icon is gobbled up by private equity firms. This one needs to be out of the SEC reporting limelight ASAP to save the myth that competition drives down prices. Underwriting the monstrous energy deal is a laundry list of investment houses, Goldman Sachs, Morgan Stanley, Kohlberg Kravis Roberts, and Texas Pacific Group among others. Special advisor to the new board is none other than a big Carlyle Group hotshot, James A. Baker.

The big Texas utility company is expected to announce record earnings for 2006 shortly. For serving 2.4 million customers Wall Street expects TXU to make $2.5 billion. That equates to $1,000 profit per customer. As a Texas electricity purchaser, I can assure you deregulation did not reduce my energy bill. It has gone one way, much higher. TXU’s third quarter profits nearly doubled from 2005’s $565 million, reaching $1 billion in 2006. Their gain symbolizes my pain.

Growing dollars exponentially is what the investment consortium expects from their purchase. With increased profitability requirements and a future IPO a few years away, how much more will the average Texan get screwed by free market economics?

TXU is being bought out for $45 billion which exceeds the last record purchase of HCA for $33 billion. What were once local public utilities, electrical generating plants and hospitals are now big money generators for their owners and shareholders. As for the next government giveaway look no further than you local highways, state lottery, or public water systems. Something stinks and it smells a lot like dirty money.

How does the dirty money wash through the system? First executives and board members get obscene compensation plans replete with stock options. Recall the widespread cheating displayed by those same leaders in the most pure pay for performance scheme, stock options?

Take Tom L. Baker, President of TXU, how will he do in this buyout? On top of his $14.4 million in annual compensation, Tom will make a super sized yachtload off his stock holdings. With 610,000 shares owned or beneficially owned, Mr. Baker stands to gross $41.48 million at the current price of $68 per share. That pales compared to his Chairman of the Board, C. John Wilder who controls 2,876,351 shares of TXU stock. That translates to $196 million in proceeds from the private equity buyout.

What happens when $237 million in capital gains are taxed at 15% vs. the old 20% rate? Mr. Baker and Wilder save almost a cool $12 million dollars in taxes courtesy of President Bush’s tax cuts. This, after all, is the President’s base…

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