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Private equity shops, saddled with companies they bought but don’t want to hold on to forever, are getting creative with their exit plans.
Take the owners of US power producer Calpine. They just agreed to sell to Constellation Energy for $16.4bn plus net debt, with the equity part made up of $4.5bn in cash and 50mn of the buyer’s shares.
That Calpine’s backers, led by Energy Capital Partners, are willing to take their payout mostly in Constellation stock — and agree to an 18-month lock-up period — is telling. Ideally, private equity firms look to sell their investments for cold, hard cash that they can return to investors. Moreover, the deal values Calpine at just under eight times its forecast 2026 ebitda, a big discount to the average of about 12.3 times for the sector’s big three players.
But the deal makes sense for both sides, considering the alternatives. Calpine could have gone down the IPO route, for example. The share prices of independent power plant owners have been on a tear, helped by rising demand for electricity from energy-hungry artificial intelligence data centres.
Energy Capital Partners may have been able to get a higher valuation for Calpine with an IPO. It would have probably only been able to float between 15-30 per cent of Calpine, though, and would probably have needed to price the shares at a discount to peers with longer histories as listed companies.
The real winner here is Constellation, whose shares rose 24 per cent on Friday — a rare outcome for a company announcing a big takeover. Even though it didn’t give any numbers on potential cost savings, the market is pricing in a heap of value creation.
Constellation is the largest producer of nuclear power in the US and Calpine is one of the largest generators of electricity from natural gas and geothermal sources. Combining the two would put it in a strong position to provide low-carbon electricity to the tech sector, especially in Texas and California, two of the most electricity-hungry states in the US.
Does that mean Calpine sold too cheap? Probably. But at least its owners get to share in Constellation’s bonanza. And they’ve more than made their money back. Energy Capital Partners and its co-investors paid $5.6bn in cash to take Calpine private back in 2017. In total, after accounting for the rise in the buyer’s shares, ECP and friends look to have roughly quadrupled their original equity contribution.
In an ideal world, buyout firms acquire companies, grow them, cash out and move on. With the pipeline bulging, many will have to make compromises. Calpine shows that second best can sometimes be pretty good.
pan.yuk@ft.com
