Last month a consortium led by Kohlberg, Kravis, and Roberts announced the largest private-equity deal in U.S. history, a $45 billion transaction to take TXU, the Texas electric utility, private. TXU manages a portfolio of competitive and regulated energy businesses, and the deal includes price cuts, price protections, investments in alternative energy, and stronger environmental policies. But the size of the deal has sparked a backlash, and its fate is now in the hands of the Texas legislature.
In our free-market system, there should be a strong presumption against government interference in respect to deals where both sides expect to benefit. For instance, there are sound reasons to believe that TXU will create more value for the Texas economy and its shareholders as a private company than it has as a publicly traded company. As a private entity, TXU can set longer time horizons and operate free of onerous federal regulations. Moreover, legislative interference in Texas — in the form of new, retroactive requirements — would undermine predictability in the regulatory environment, and thus business confidence throughout the state, since companies could see months of work made worthless by new retroactive requirements.
As Charles Koch, the extraordinarily successful CEO of Koch Industries, a large diversified energy company in Wichita, recently stated, “Most publicly traded companies focus on short-term quarterly earnings reports and, therefore, have a hard time maximizing long-term value.”
Just look at TXU’s CEO, who is compensated based on the company’s share price. This is logical since creating shareholder value is the CEO’s mandate, but it creates a clear short-term imperative. Many shareholders hold stocks only for months. The acquiring companies in the TXU deal have committed to retaining ownership for at least five years, allowing them to take a longer-term outlook on the investments that are needed to meet Texas’s energy needs.
Due to the burdens of Sarbanes-Oxley and other onerous federal regulations, it is a sad but true commentary on U.S. public capital markets that private equity has become a less expensive and more accessible way to raise large amounts of capital. Private equity has been both an escape hatch and a backstop during recent stock market declines. Given the size and profile of the TXU deal, if it is derailed by the state legislature it could have a chilling impact on large private-equity deals nationally, while removing crucial price support from the stock market.
Absent any major reforms to public capital-market regulation, private equity will remain the most economical source of capital for large companies. TXU should not be shut out of the private-equity market, especially in consideration of the enormous capital investments needed to meet energy demand.
Energy companies, it must be remembered, are favorite targets of leftist advocates and are subject to substantial risks that make their stock vulnerable on the public exchanges.Going private would allow TXU to focus on running its business and creating value for its customers. Current shareholders, who are being offered a substantial premium for their shares, also would be clear winners.
At presstime, the most egregious option under consideration by the Texas legislature, SB 896, would retroactively require a state Public Utilities Commission review of the deal, most likely in order to block the deal outright or impose uneconomic restrictions that would derail it. The PUC has no expertise in this area, nor is it clear how the actual review process would work.
But predictability is the mother of business confidence, and businesses should not have to fear that their actions, taken in compliance with all existing laws and regulations, will be subject to legislative meddling after the fact. Such fear would undermine the entrepreneurial risk-taking that fuels economic growth.
Moreover, were a state legislature to block a major private-equity deal, the precedent set could make for fewer such deals and remove crucial price support from the stock market.For the sake of the prosperity of both Texas and the U.S., the Texas legislature should not derail the TXU deal.