A merger that would have united the two largest U.S. independent power producers has hit a roadblock.

Calpine Corp. (CPN) has rejected NRG Energy Inc.’s (NRG) initial offer, saying the 0.534 shares for each share of Calpine’s approximately 500 million shares outstanding is inadequate.

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"I don’t think anyone should be surprised by Calpine’s announcement," Gordon Howald, an analyst with Calyon Securities USA Inc. in New York, told Bloomberg News. Howald has a "buy" rating on NRG shares, but doesn’t own any. "If they were to accept the first bid as laid out, they would probably be doing their shareholders a disservice."

Calpine has 60 power plants capable of producing 23,000 megawatts of electricity, while NRG maintains 49 plants with a total capacity of 24,120 megawatts. A successful takeover would double NRG’s capacity in the United States to about 45,000 megawatts, enough to power 36 million homes. 

Despite rejecting the initial bid, Calpine stated it is examining whether "there is a basis for discussions between the two companies to explore a business combination," The Associated Press reported. However, the company stressed that it’s possible no deal would ultimately result from the talks.

"We respect the Calpine Board’s decision but are disappointed that they have decided not to move quickly to deliver the benefits of our proposal to Calpine’s shareholders," David Crane, NRG’s chief executive officer, said in a statement, Bloomberg reported.

The company remains interested in the deal, Crane added.

NRG would benefit from Calpine’s strong presence in California and its focus on cleaner burning natural gas. But there could be other interested suitors.

Other power companies that could throw their hat into the ring for consideration include Constellation Energy Group Inc. (CEG), Reliant Energy Inc. (RRI) and Mirant Corp. (MIR), James Halloran of National City Corp.’s (NCC) Private Client Group in Cleveland, an analyst who helps oversee $38 billion in assets, including about 13,500 NRG shares, told Bloomberg. A less likely possibility is Dynegy Inc. (DYN), Halloran added.

"There’s going to be a lot of negotiations in this," Halloran said. "I think you’ll get at least one or two other possible bidders on it."

Calpine shares closed up 25 cents on Friday, an increase of 1.10%, to close at $22.94. NRG shares also gained, closing up 87 cents for the day, an increase of 2.13%, at $41.68.

News and Related Story Links:

• Bloomberg News:
  Calpine Says NRG Offer Inadequate, May Seek Talks

• Forbes:
  Calpine rejects NRG offer, but leaves wiggle room

• Money Morning:
  NRG Looks to Electrify its Business with $11.3 Billion Calpine Takeover

Princeton, NJ- based NRG Energy Inc. (NRG) has publicly acknowledged its estimated $11.3 billion takeover bid for Calpine Corp. (CPN) – a wholesale provider of electricity emerging from chapter 11 bankruptcy protection.

NRG acknowledged Wednesday that it made the initial $22.98 a share offer on May 14.  NRG said the deal assumes Calpine had 500 million fully diluted shares outstanding as of May 13. That calculation would value all of Calpine at $11.35 billion.

NRG offered to pay 0.534 shares for each share of Calpine, the company said in a statement. Based on NRG’s Wednesday closing price of $42.51, the deal values each Calpine share at $22.70, a 6.7% premium to Calpine’s closing price of $21.20.

"This is quite simply, the right deal, at the right point in time, between the right partners," David Crane, NRG’s chief executive officer said in a statement.

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After over-expanding during a period of high electricity prices, the company was unable to carry its heavy debt load as prices began to drop in 2002 and was forced into bankruptcy in 2005.

Calpine laid off more than 1,000 employees – a third of its workforce at the time – and restructured more than $20 billion in debt. Analysts anticipate a buyout will result in more job cuts as NRG aims to lower annual expenses by eliminating overlapping positions.

NRG spent seven months operating under Chapter 11 bankruptcy itself in 2003. NRG said that it is "becoming a full taxpayer four years out" of its own troubles, and the combined company will be able to make the best use of Calpine’s $5.1 billion of net-operating-loss carry-forwards, Dow Jones reported. While Calpine is still putting together its post-Chapter 11 team, NRG says it has strong management immediately available.

"We believe Calpine’s lack of a management team, plus NRG’s established (and in, our view, well-regarded) management team, will likely weigh heavily on Calpine’s board as it deliberates negotiations," NRG said.

Right now, Calpine has 60 power plants capable of producing 23,000 megawatts of electricity, while NRG maintains 49 plants with a total capacity of 24,120 megawatts.

The takeover would double NRG’s capacity in the United States to about 45,000 megawatts, enough to power 36 million homes. 

NRG would also benefit from Calpine’s focus on cleaner natural gas fuel, as lawmakers seek to reduce carbon-dioxide emissions. Calpine is the largest U.S. producer of electricity from gas-fired plants, Bloomberg News reported.

The Lieberman-Warner climate security act, a bill proposed by senators Joseph Lieberman and John Warner aims to reduce emissions by 66% from 2005 levels by 2050. The Senate is scheduled to begin debate on the measure next month.

News and Related Story Links:

• Dow Jones:
  Power Play: NRG Proposes To Pay $9.56 Bln Stock For Calpine

• Bloomberg:
  NRG Makes Unsolicited $9.6 Billion Offer for Calpine