Case Study

Environmental Defense - TXU

Sunday, July 20, 2008

Abstract

On February 23, 2007, your investment banking firm receives an urgent call from James D. Marston, Regional Director of Environmental Defense's Texas Office and head of the Texas Climate Initiative. You meet with him and learn that he needs help preparing for an unusual negotiation.

Marston will be flying to San Francisco for a negotiating session with the private equity firms seeking to acquire Texas electrical utility TXU, and he needs your immediate feedback. The private equity firms want two environmental groups - Environmental Defense (also known as the Environmental Defense Fund or EDF) and NRDC - at the table as they complete their deal, and Marston will be representing them. Marston certainly knows TXU, given EDF's battles over TXU's proposed new coal-fired plants. However, there is much uncertainty in this new opportunity - Marston (and you) know none of the details of the KKR (Kohlberg, Kravis and Roberts) and TPG (Texas Pacific Group) offer to TXU, nor why the private equity firms want EDF's and NRDC's blessing for the deal. After talking with Marston, you agree that your report will cover three general areas:

  1. What is the economic value of EDF's blessing to the private equity firms?

  2. What should be Marston's negotiation strategy (i.e., assess the probability that KKR and TPG would agree to various concessions and evaluate the benefit that these concessions would have for the environment)?

  3. What is the minimum level of environmental concessions that EDF should accept from KKR & TPG in order to give its blessing to the deal?