NRG to Buy Centrica’s U.S. Energy Business for $3.6 Billion - Bloomberg

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U.S. Electricity Output Rose 6.2% From A Year Earlier — Photographer: Steve Hockstein/Bloomberg

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NRG Energy Inc. is buying Centrica Plc’s North American energy business in a $3.6 billion deal that will nearly double the number of homes and businesses it serves across the U.S. and Canada.

The all-cash deal to buy Direct Energy gives NRG 3 million more retail customers and is expected to generate about $740 million in annual adjusted earnings before interest, taxes, depreciation and amortization, the Princeton, New Jersey, based company said in a statement.

It’s another step in NRG’s push to expand retail sales and reduce its exposure to price swings in wholesale energy markets. The deal will also allow the company to expand power-purchase agreements with renewable energy suppliers outside Texas.

For Centrica, the deal is a decisive move by new Chief Executive Officer Chris O’Shea as he seeks to convince investors he can turn the company around after it was demoted from the FTSE-100 U.K. benchmark stock index after 33 years. O’Shea is building on a restructuring announced last month to create a more simple business.

Shares of NRG, which currently serves about 3.7 million homes and businesses, fell 2.1% at 9:33 a.m. in New York. In London, Centrica jumped as much as 39%, the most on record during intraday trading.

The offer from NRG Energy felt “compelling”, O’Shea said on a call with reporters. “The more you can focus, the better your results can be.”

O’Shea doesn’t have an easy task as he attempts to change the course of a business that was in trouble before the coronavirus crisis. A miscalculation about where Centrica should focus its growth, a government-imposed price cap on household bills and a crash in global energy markets have all hit profits.

The Direct Energy sale “helps simplify the business back to U.K. customer focus and relives balance sheet pressure,” said John Musk, an analyst at RBC Europe Ltd. “We see these results as a clear positive for a stock that has significantly underperformed the sector year-to-date.”

Centrica stock underperforms European peers

Centrica acquired Direct Energy in 2000. It’s based in Houston, Texas, and says it’s one of the largest residential energy retailers in North America, operating in all 50 U.S. states, the District of Columbia and eight Canadian provinces.

Debt Reduction

The U.S. unit had been troublesome for Centrica in the past. In 2017, a surprise slump in earnings from its retail supply business left investors concerned that management wasn’t fully focused on the U.S. market. The proceeds of the sale will be used to reduce net debt and to make contributions to the company’s pension liabilities. The deal is expected to complete by the end of the year.

Debt investors were cheered by the U.S. disposal. The cost to protect Centrica’s bonds against default dropped to the lowest since February, as measured by 5-year senior credit-default swaps, according to ICE Data Services.