July 24, 2009 12:40 AM
Dealmaker of the Week: Stephen Fraidin of Kirkland & Ellis
Posted by Julie Triedman
Our weekly Dealmakers typically are recognized for successfully completing a deal. But this week's honoree is being singled out for helping his client fend off a multifront, eight-month hostile takeover and ensuring that a deal did not happen.
Last fall NRG Energy hired Kirkland & Ellis's Stephen Fraidin after Exelon, the country's largest electric utility, launched an unsolicited bid. NRG's board and its feisty CEO, David Crane, were loathe to do the deal.
Exelon's original bid, worth $6.2 billion, was a 37 percent premium over NRG's share price at the time. But NRG's stock had plunged in previous months of market turbulence. After three weeks of evaluating the stock-for-stock proposed bid, NRG's management and board resoundingly rejected it as too low. A month later, Chicago-based Exelon turned up the heat, launching a three-pronged attack: an exchange offer directly to NRG shareholders, a proxy fight over board control, and litigation against NRG's board.
From winter into spring, NRG's board got an unexpected boost. The company's stock price surged, making Exelon's offer less attractive. Exelon's offer weakened, attracting only 12 percent of NRG investors to tender their shares by the time of an interim deadline in mid-June. Exelon responded with a sweetened bid, 15 percent higher than the original offer, but NRG's board again rejected the offer.
Undeterred, Exelon appealed to NRG's shareholders once again, imploring them to vote in nine new pro-merger directors at its July 21 annual meeting.
"There is simply no business plan or alternative strategic transaction that NRG can pursue that will come close to creating the substantial value that we believe you will get from a combination of NRG with Exelon," Exelon CEO John Rowe wrote to NRG shareholders.
But, no matter how persistent Exelon was, NRG was determined to stave off any bid, and the company had the right lawyer on the job. At an age when many dealmakers are spending more time on the golf course than in the office, Kirkland's Fraidin, 70, has been front and center on many high-profile proxy battles in the past year. He's represented both activist hedge funds and the companies defending themselves against funds--an unusual diversity of practice.
A few weeks before Exelon launched its proxy effort, Fraidin had been tapped by William Ackman and Pershing Square Capital in an (ultimately unsuccessful) effort to get a slate of five candidates on the board of Target Corp. And last year, Fraidin represented activist investor Sun Capital Partners in its successful effort to get a minority slate of directors elected to the board of Furniture Brands International. He also helped hedge fund 3G Capital Management in its similar successful effort to stack railroad operator CSX Corp.'s board.
Fraidin applied his long experience to NRG's defense, says Michael Bramnick, the power company's senior vice president and general counsel. "This was someone which an encyclopedic knowledge of M&A history," Bramnick says. "We asked him to help us understand what Exelon's next move would be. He helped us plan for all the possible scenarios."
Ultimately, Fraidin says, it wasn't fancy lawyering that won the battle. This "was not a situation where there was a poison pill," Fraidin says. Exelon's offer simply had conditions that created too much uncertainty for NRG.
For instance, the offer required Exelon's shareholders to approve an NRG deal--an unusual condition. Also, the sale would have triggered the immediate need to repay $8.5 billion in NRG corporate debt, and NRG didn't think Exelon had locked up the required refinancing, which would have cost hundreds of millions of dollars in additional fees and higher rates.
Regulatory concerns were also significant. Energy regulatory approvals remained to be obtained, increasing uncertainty for NRG, and the Department of Justice, in its antitrust review, had issued a second request for supplementary information. That request indicated that regulators were likely to require NRG to shed some of its assets, and "you never know what you're going to get in a market like this one," Fraidin says.
Ultimately, NRG shareholders voted down Exelon's slate of directors because the board was able to convince them the company was worth more on its own.
"It was as simple as that," Fraidin says.