(Reuters) - NRG Energy (NRG.N) struck a deal to buy rival GenOn Energy Inc (GEN.N) for $1.7 billion in stock, forming the largest U.S. independent power producer as the companies contend with sagging electricity prices.
The deal will allow the companies to save around $300 million annually beginning in 2014 from cost and operating improvements as well as balance sheet efficiencies.
Independent power producers like NRG and GenOn who sell electricity at competitive rates, have been hit hard in recent years as weak demand for electricity and low natural gas prices have taken their toll on power prices.
The two energy companies said on Sunday the combination would create the largest competitive U.S. generator with a fleet of 47,000 megawatts, with assets concentrated in the east, west and on the Gulf Coast.
NRG said it will pay 0.1216 share of its common stock — worth just under $2.20 a share based on Fridays close — for each GenOn share. That is a more than 20 percent premium over GenOn’s Friday closing price of $1.82 a share.
The transaction is expected to close in the first quarter of 2013, the companies said in a joint statement.
GenOn shareholders will own around 29 percent of the combined company. The new board will have 16 members, with 12 from NRG and four from GenOn’s board.
NRG’s David Crane will continue to serve as CEO, while GenOn chairman Edward Muller will join the NRG board as vice chairman alongside NRG chair Howard Cosgrove.
The independent power producer industry took off in the 1990s as electricity markets moved toward deregulation. But Enron’s infamous bankruptcy and stretched balance sheets has curtailed sector growth and pushed the companies to consolidate.
NRG bought Texas Genco for $6 billion in 2005 and unsuccessfully bid for competitor Calpine CPN.N in 2008. GenOn was formed by the 2010 combination of IPPs Mirnat and RRI.
NRG’s Crane, one of the more visible CEOs in the industry, has aggressively moved his company toward clean energy, even while it owns coal and nuclear plants.
“The combination offers a staggering amount of value to the owners of the company,” GenOn’s Muller said in an interview, referring to the cost savings. “Scale makes these companies more efficient.”
The deal will allow NRG to expand its reach in the Northeast and California.
Crane said in an interview that the company plans to follow the model it uses in Texas — where it has a wholesale business that sells power to utilities and other large industrial customers and a retail business that competes with utilities to serve residential and business customers — in other regions.
The companies said the combined entity would boost earnings before interest, taxes, depreciation and amortization (EBITDA) by $200 million by 2014 through cost and operational savings. They expect free cash flow to have a total recurring benefit of around $300 million a year. The companies also said the combined entity would be able to reduce indebtedness by $1 billion.
NRG said it expects the combined company to have an adjusted EBITDA of $2.535 billion to $2.735 billion in 2013 and $2.630 billon to $2.830 billion in 2014.
NRG said its board of directors had agreed to declare its first-ever quarterly dividend of 9 cents a share on August 15 to shareholders of record as of August 1. The company said the transaction would reinforce its ability to pay the dividend.
NRG pre-announced that it expects adjusted EBITDA to be around $530 million in the second quarter. It also reaffirmed its guidance of $1.825 billion to $2 billion of adjusted EBITDA in 2012 and $800 million to $1 billion of free cash flow before growth investment.
Reporting by Yinka Adegoke in New York; Editing by Dale Hudson, Gary Crosse