Largest LBO Failure in History
In 2007, KKR & TPG bet on the “safest” asset class.
In reality, it was a ticking bomb.
The biggest PE bankruptcy ever.
Thread
In 2007, KKR & TPG bet on the “safest” asset class.
In reality, it was a ticking bomb.
The biggest PE bankruptcy ever.
Thread
TXU looked like a dream LBO:
- Largest coal power operator in Texas
- 3M retail customers
- $4B EBITDA
- Stable utility cash flows
KKR & TPG thought they’d locked in a “safe” annuity.
Instead, they set a ticking bomb.
- Largest coal power operator in Texas
- 3M retail customers
- $4B EBITDA
- Stable utility cash flows
KKR & TPG thought they’d locked in a “safe” annuity.
Instead, they set a ticking bomb.
Why they did it:
Bet on rising natural gas prices
Deregulated Texas market = growth
Monopoly-like infrastructure
Classic “steady cash flow + leverage” LBO profile
$44.3B EV, 8.5x EBITDA, $36B of debt.
It was supposed to be a cash-printing machine.
Bet on rising natural gas prices
Deregulated Texas market = growth
Monopoly-like infrastructure
Classic “steady cash flow + leverage” LBO profile
$44.3B EV, 8.5x EBITDA, $36B of debt.
It was supposed to be a cash-printing machine.
Politics & PR:
TXU planned 11 new coal plants = environmental backlash.
To get the deal approved, KKR/TPG:
✅ Cut new plants to 3
✅ Promised carbon cuts
✅ Slashed residential prices 10%
✅ Put WWF Chairman on the board
It was the first “green” mega buyout.
TXU planned 11 new coal plants = environmental backlash.
To get the deal approved, KKR/TPG:
✅ Cut new plants to 3
✅ Promised carbon cuts
✅ Slashed residential prices 10%
✅ Put WWF Chairman on the board
It was the first “green” mega buyout.
Deal Structure:
$24.5B senior secured loans
$11.25B unsecured bridge
$8B equity
Advisors: Credit Suisse & Lazard
Banks: GS, Citi, JPM, Lehman, MS
TXU renamed to Energy Future Holdings and split into Luminant, Oncor, and TXU Energy.
$24.5B senior secured loans
$11.25B unsecured bridge
$8B equity
Advisors: Credit Suisse & Lazard
Banks: GS, Citi, JPM, Lehman, MS
TXU renamed to Energy Future Holdings and split into Luminant, Oncor, and TXU Energy.
The Thesis:
Gas prices stay high → electricity prices follow → TXU’s coal & nuclear plants print money.
Leverage magnifies returns.
It was a commodity macro bet disguised as a utility LBO.
Gas prices stay high → electricity prices follow → TXU’s coal & nuclear plants print money.
Leverage magnifies returns.
It was a commodity macro bet disguised as a utility LBO.
What happened next:
2008 recession = Texas power demand -7.6%
Fracking boom → gas prices collapse
TXU’s “steady” cash flow evaporates
$3B interest payments choke the company
By 2014, $35B of debt = impossible to repay. Bankruptcy.
2008 recession = Texas power demand -7.6%
Fracking boom → gas prices collapse
TXU’s “steady” cash flow evaporates
$3B interest payments choke the company
By 2014, $35B of debt = impossible to repay. Bankruptcy.
Damage Report:
KKR writes down 50% of equity by 2009
Warren Buffett calls his $2B EFH bonds a “big mistake”
Credit rating sinks to Caa1
$3.2B negative book value
KKR writes down 50% of equity by 2009
Warren Buffett calls his $2B EFH bonds a “big mistake”
Credit rating sinks to Caa1
$3.2B negative book value
Lessons
Don’t LBO commodity bets. Cyclicality + leverage = death.
When banks are handing out unlimited debt… you’re likely at the top.
Past wins ≠ future wins. TXU wasn’t Texas Genco 2.0 – the macro flipped.
Don’t LBO commodity bets. Cyclicality + leverage = death.
When banks are handing out unlimited debt… you’re likely at the top.
Past wins ≠ future wins. TXU wasn’t Texas Genco 2.0 – the macro flipped.
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