Mirant, RRI Shares Gain On Expected Cost Savings From Merger
APRIL 12, 2010, 10:43 A.M. ET
NEW YORK (Dow Jones)--The merger of Mirant Corp. (MIR) and RRI Energy Inc. (RRI) won't create much of a premium for shareholders, but both stocks gained Monday, likely thanks to the cost savings the deal will generate.
Mirant and RRI announced Sunday that they agreed to merge in a deal that would create one of the biggest independent power producers in the U.S., with a market value of about $3.1 billion. The all-stock deal will deliver little premium for shareholders, with the exchange ratio based on average market prices of both company's shares prior to the announcement.
But shareholders seemed to appreciate the $150 million in annual cost savings the merger is expected to create by 2012. The companies will combine corporate headquarters, back-office functions such as accounting and human resources, and consolidate information-technology systems.
Shares of RRI were recently up 13% to $4.46 as Mirant climbed 18% to $12.68. Prior to Sunday's announcement, both stocks had been down more than 30% year to date.
Simmons and Co. analyst Neel Mitra thinks the deal strategically makes sense, but he said Monday's share gains are likely overdone. The merger clouds the fundamental outlook for both companies, which are struggling with declining earnings due to weak commodity markets, he said.
The deal lifted shares of other independent power producers, with NRG Energy Inc. (NRG) recently up 3.3% to $22.52, Dynegy Inc. (DYN) up 4.2% to $1.25 and Calpine Corp. (CPN) up 2.4% to $12.42.
These gains are likely because the independent power-producer sector usually moves as a group, so when something as newsworthy as the RRI-Mirant merger occurs, there tends to be a pass through for the rest of the sector, Mitra said.
The merger helped Mirant earn an upgrade to neutral from underperform from Macquarie. Given that both Mirant and RRI have strong balance sheets, the firm said, the upside to the deal should be derived entirely from cost savings.
"That should be enough to support current valuation of MIR, in our opinion," the firm wrote.
The companies, which expect to spend $125 million in one-time costs to achieve the savings, plan to close the merger by the end of the year.