NRG Energy Inc.'s (NRG) plan to acquire rival GenOn Energy Inc. (GEN) in a $1.7 billion all-stock deal appeared to resonate with investors Monday, as both companies' shares rallied despite a broad downturn in U.S. stocks.
The companies said they expect their combination to bring in $300 million a year in savings from lower administrative and financial costs, and create the largest competitive power company in the U.S.
NRG shares were recently up 7.3% at $19.36, while GenOn stock shot up 26% to $2.29. The Dow Jones Industrial Average, by contrast, was down nearly 1%.
The deal was widely viewed as a boost for both companies which, along with their rivals, have struggled against some of the lowest wholesale power prices in a decade. A boom in U.S. natural gas production and a sluggish economic recovery have driven down gas prices, which serve as a driver and something of a proxy for power prices. The low prices have put a strain on coal-plant operators in particular, as coal prices haven't fallen in line with natural gas.
NRG said it initially plans to use the $300 million a year in savings to pay down debt and possibly buy back shares after the deal closes, which is expected in early 2013.
Chief Executive David Crane said the company also would be looking to make new investments.
"It is time for this country to reinvest in its energy infrastructure," Mr. Crane said during a conference call with reporters. "If we can get a good return for our shareholders, we will reinvest in our infrastruture."
NRG also said its board declared a quarterly dividend of 9 cents a share, for the first time, in what would be a 36-cent annual dividend.
In addition to its large fleet of nuclear, natural gas and coal-fired power plants, NRG operates a growing retail-electricity business that serves customers in Texas and other states that have deregulated their power markets. NRG also has a solar-power business and an electric-vehicle charging company based in Texas, with plans to expand to California.
A number of analysts said the deal was good for both companies, particularly as competition grows in both the wholesale power markets and the retail power markets in deregulated states.
"Although the rationale behind the merger clearly lies in the cost savings, the extent to which the increased physical footprint aids in NRG's already existing push to expand the retail business should be a benefit to shareholders," said UBS AG (UBS) analyst Julien Dumoulin-Smith. UBS increased its stock-price target for NRG by $6 to $25 a share, and raised its target for GenOn stock by $1.50 to $3 a share.
Among the companies' rivals is U.S. power giant Exelon Corp. (EXC), which aquired rival Constellation Energy Group in March in a nearly $8 billion all-stock deal. The combined company owns three regulated utilities, but also has a large wholesale power business and a large retail-power business developed by Constellation.
Mr. Crane and GenOn CEO Edward Muller said a key factor that brought their companies together was a common desire to be a bigger company. Both men predicted that the wholesale power industry would consolidate further.
GenOn, of Houston, will become a subsidiary of Princeton, N.J.-based NRG. Together, the companies will operate 47,000 megawatts of coal, natural gas and nuclear power plants, which together can serve about 40 million homes, the companies said.
NRG said it expects yearly earnings before interest, taxes, depreciation and amortization, or Ebitda, of $1.7 billion to $1.9 billion in 2013 and 2014 without the merger. GenOn expects standalone earnings before interest and taxes of $687 million in 2013 and $730 million in 2014. Together, the companies predicted 2013 earnings before interest and other items of $2.535 billion to $2.735 billion, and 2014 earnings of $2.63 billion to $2.83 billion, significantly above their standalone earnings forecasts.
"They're very powerful numbers, even with the low gas-price numbers we're seeing today," Mr. Crane said.
NRG plans to continue expanding its retail electricity business in Texas and the Northeast, particularly in New Jersey and other Mid-Atlantic states that have deregulated their electricity markets. Having a much larger generation fleet will give the retail business a major boost, Mr. Crane said.
GenOn's power plants in the Northeast, in particular, will allow NRG's retail business to grow at a lower cost than it otherwise would, Mr. Crane said.
"In this low gas-price environment, retail is an area where we feel we can expand profitably," Mr. Crane said.
-Write to Cassandra Sweet at cassandra.sweet@dowjones.com
