Harbinger Capital Partners(R) Recommends Calpine Corporation Review NRG Energy, Inc.'s Proposed Merger of Equals
2008-05-22 01:14:41 -
- Finsbury Group: Andy Merrill / Tripp Kyle, +1 212-303-7600 andy.merrill@finsbury.com tripp.kyle@finsbury.com The Harbinger Capital Partners(R) Funds today sent the following letter to the Board of Directors of Calpine Corporation (NYSE: CPN) regarding NRG Energy, Inc.'s (NYSE: NRG) proposed merger of equals:
HARBINGER CAPITAL PARTNERS(R)
555 MADISON AVENUE, 16th FLOOR
NEW YORK, NY 10022
TEL: 212 521 6970 FAX: 212 521 6971
WWW.HARBINGERCAP.NET
May 21, 2008
Members of the Board of Directors
Calpine Corporation
50 West San Fernando Street
San Jose, California 95113
We write concerning the merger offer the Company received last week from NRG Energy, Inc. Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. collectively own in excess of 24% of the outstanding shares of Calpine Corporation. As Calpine's largest shareholder, the interests of Harbinger are squarely aligned with those of all of the Company's shareholders, namely to maximize the value of Calpine while being mindful of the Company's responsibilities to the other constituencies that it serves. We do not seek to influence Calpine's operational policies and we have no plans to acquire control of the Company. Furthermore, Harbinger has not solicited the NRG offer and owns no NRG stock.
We understand that NRG has proposed to merge with the Company at a premium to Calpine's price on May 14th, 2008, the day the offer was delivered. We believe this offer represents a good starting point and that the Board should immediately engage with NRG concerning the terms. We have yet to identify anything objectionable about the offer that cannot be resolved through negotiation. We note that the current trading price of Calpine before the premium to be paid by NRG is itself already more than 20% greater than the value that many Board members supported only last fall as the value of the common stock in the bankruptcy proceedings. Clearly, more than anyone else, the Board members who several months ago believed Calpine's stock was worth $17.36 a share are in a position to appreciate the value creation for Calpine shareholders that the NRG offer represents. Moreover, NRG's offer is an opportunity to create value for Calpine's warrants, issued to the shareholders of old Calpine, which are otherwise likely to expire worthless in August if Calpine's price remains at current levels. (Harbinger was the largest shareholder of old Calpine and we believe is the largest holder of those warrants.)
The timing of this offer is excellent for Calpine, as it has not yet settled on a strategic view or chief executive officer and therefore Calpine does not have the typical "social issues" such as management roles and strategic differences, which can make a merger negotiation difficult. We note that it is now six months after the new Board was identified and four months after exiting bankruptcy, and the Company still lacks a permanent management team. Any new management team, once identified, will need time to develop a corporate strategy with the Board. We further note that this has occurred even though five of the Board's current members were either members of the old board or the creditors committee.
We now find ourselves in a remarkable situation. Calpine--one of the largest providers of electricity and consumers of natural gas in the United States, with a massive commodity exposure to manage and with relatively high financial leverage--is being run principally by a consultant and a part time chief financial officer. This is an untenable situation in our view, and we know that many of our fellow shareholders agree. The NRG offer effectively addresses this situation, for the benefit of all Calpine constituencies. NRG offers the combined company a fully focused management team and a well articulated strategy already in place.
If and when the merger discussions with NRG terminate without agreement on a transaction, the Board can hire a new CEO with no uncertainty as to his role with the Company. Introducing new management to Calpine before an NRG merger will only dilute shareholders through unnecessary management compensation and complicate negotiation over the business combination and leadership of the surviving entity. Installing new management while in the midst of negotiations over a transforming transaction like a merger with NRG would also be confusing to the Company's employees and other constituencies.
We have met with NRG and its advisors, at NRG's request, and we make the following observations:
-- The combined company will own approximately 45,000 MWs of generation in the U.S., making it the largest IPP in the country with significant opportunities for cost savings.
-- Mr. David Crane, the chief executive officer of NRG, has direct experience which would benefit Calpine, with a proven track record in restoring excellence to NRG after its exit from bankruptcy and managing the complex merger with Texas Genco.
-- NRG has a proven and effective energy management operation and development pipeline, which given the dislocation of bankruptcy, will take Calpine time and money to rebuild, at significant risk.
-- The combined company should be able to utilize Calpine's NOLs and deferred tax assets in an accelerated manner, creating significant value.
-- A stock-for-stock exchange would deliver a premium to Calpine shareholders while providing a continued opportunity for stock price appreciation.
-- NRG adds an attractive level of cash flow stability, and improved credit metrics, while still providing significant growth potential.
-- We understand that no single shareholder of NRG owns in excess of 10% of its voting stock, so that shareholders of Calpine would not be ceding control of the combined company to any person or entity and the concentration in ownership at Calpine would be reduced.
We write this letter to make sure that all Board members and shareholders are aware of the current situation. We are focused only on the interests of Calpine and its shareholders and expect the Board will not use the NRG offer as a pretext for altering the balanced and carefully crafted governance provisions in place or for instituting anti-takeover protections burdening the ability of shareholders to act, individually or collectively, to protect their interests.
In conclusion, we believe the Board, in the exercise of its fiduciary duties, must now make the full terms of the offer public so that all shareholders can express their opinions to the Board. The Board must also put the search for a management team on hold for a brief period so that it may explore this offer in a comprehensive manner with all deliberate speed and diligence. The Board, its advisors and consultants are capable of evaluating and negotiating a transaction with NRG in a few weeks without having to rely on a new management team, much in the same way the previous Board functioned in determining plan value in the bankruptcy. If, after the Board completes its due diligence of NRG and in good faith attempts to negotiate the proposed combination, it concludes a merger is not advisable, we would expect the Board to communicate to shareholders with specificity the reasons for such a decision.
Sincerely,
Howard Kagan
Managing Director
cc: Kenneth T. Derr
Frank Cassidy
Robert C. Hinckley
Robert P. May
David C. Merritt
W. Benjamin Moreland
Denise M. O'Leary
William J. Patterson
J. Stuart Ryan
About the Harbinger Capital Partners Funds
Founded in 2001 by Philip A. Falcone and Harbert Management Corporation, Harbinger Capital Partners has grown to one of the 15 largest hedge funds, by assets, in America. Harbinger's mission is to achieve superior returns through investments in distressed/high yield securities, special situations and private loans and notes. The firm consists of a team of investment professionals who seek to develop investment opportunities through analytical rigor coupled with a contrarian viewpoint.
Calpine's Largest Shareholder Urges Board to Put CEO Search on
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