NRG, Vivint could be attractive buyout targets for private equity firms

NRG Energy Inc. and its recently acquired Vivint Smart Home Inc. unit could be attractive targets to be taken private, in the view of some industry experts, after activist investor Elliott Management Corp. announced it will pursue board changes, cost cuts and a potential spinoff of the smart home security platform.

Since agreeing to a $5.2 billion deal for Vivint, which closed in March, NRG shares have nosedived, adding to investor concern over power plant performance in 2021 and 2022. But many analysts are not convinced that Elliott's plan to create another $5 billion in shareholder value is the best strategy for the independent power producer, either.

Vivint could be primed for private capital investment, according to Peter Gardett, climate and cleantech executive director at S&P Global Commodity Insights.

"Vivint itself is the kind of company private equity firms have been really interested in ... and we wouldn't be surprised if NRG has received interest from private equity in taking it off their hands," Gardett said in an interview, citing Partners Group Holding AG's majority stake ownership in energy-as-a-service provider Budderfly Inc., which it acquired in 2022. Similar to Vivint, Budderfly uses technology to measure, reduce and manage energy demand and consumption.

Guggenheim told clients May 15 that Elliott's conversations with NRG's board may result in "some sort of eventual take-private."

Although finding a private buyer for a company the size of NRG would be more difficult given commercial banks' reluctance to finance debt in a higher interest rate environment, Gardett posited that European private infrastructure firms would most likely be able to afford such a transaction.

Sovereign wealth funds like Singapore's Temasek Holdings (Pvt.) Ltd. could also write larger checks, but US regulators might balk at foreign ownership, he said, adding that for now, US private equity firms seem more "comfortable" with midmarket targets.

The most recent, similar independent power producer take-private transaction occurred in 2021 when I Squared Capital Advisors LLC agreed to buy Atlantic Power Corp. for $961 million. In the power and utilities sector more broadly, an investment vehicle advised by JPMorgan Chase & Co. took natural gas utility South Jersey Industries Inc. off of the New York Stock Exchange via an $8 billion leveraged buyout that closed in February.

Large power sector take-privates are still financially feasible as long as buyers use more equity than debt, Alan Wink, managing director of capital markets at accounting firm EisnerAmper, said.

"There's certainly a number of blue chip private equity firms that are sitting on enormous pools of capital," Wink added. "Many multibillion-dollar funds have the financial capability to take these companies private."

But NRG would be prohibitively expensive because change of control covenants allow bondholders to recover their investments in the event of a buyout, according to CreditSights analyst Andrew DeVries.

"In addition to the equity buyout, a private equity buyer would have to refinance all the debt, so we are talking $25-plus billion of financing and we don't see that as likely," DeVries wrote in an email. "I don't see any private equity firm committing that much capital in a sector that has significant commodity price exposure, is under rapid transformation from renewables and thus has uncertain outcomes and still has significant coal ownership that somewhat limits their financing avenues."

Compared to Vistra Corp., which announced the purchase of retail and generation company Energy Harbor Corp. in March for $3 billion, NRG spent $8 billion on Vivint and retail provider Direct Energy LP, both which have "very few, if any, hard assets at all," DeVries continued.

Vistra's stock price has gained over 15% since the Energy Harbor announcement to settle at $24.56 on May 23.

Energy Harbor has more than 4 GW of merchant nuclear capacity in the PJM Interconnection LLC market and serves more than 1 million retail electricity customers in PJM and the Midcontinent ISO regions. Vistra said it will not acquire Energy Harbor's legacy fossil generation fleet.

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