We predicted 2007 would be the year private equity goes after energy assets. So what does KKR (AMS: KPE) and Texas Pacific's $US32 billion buyout of Texas electricity utility TXU Corp. (NYSE: TXU) forebode? Will there be new deals ahead?
Yes, but beyond those three letters it gets murky. TXU's private equity buyers aim to shift the company's strategy of adding coal-fired generation capacity to… something more friendly to Oscar Winner and Climate Morality Czar Al Gore. More friendly to the atmosphere than coal? What ever could that be? Fuel cells? Nuclear? The sun?
First things first. The pirates don't do anything that isn't good for them first. They would sell Mother Earth to the Man in the Moon if there was a profit to be made. It could be KKR is putting the kibosh on new plants because of the capital cost. When you're loading up a balance sheet with debt just to go private, why ad more debt on top of that? .
A vaguer, greener explanation is that the pirates see the worm turning in the economics of energy production from fossil fuels and are going green because there're more green it. That, however, is a theory with quite a few holes in it.
The truth is, we have no idea of how the new TXU will solve Texas energy problems. But we suspect it will be a portfolio of alternative energy solutions alongside more conventional Texas tea and gas. And in the meantime, we are diligently drilling down into the alternative energy sector for smaller, development firms, where a lot of the R&D in the energy business is being done.
Private equity may be looking for more big fish to land. But the little fish are doing all the development in the alternative energy space. And that's where individual investors could see big gains this year, provided they buy the right clean-energy shares before the dread pirates equiteers.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
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