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NRG Energy (NRG) to Buy Direct Energy, Eyes a Solid Footprint

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NRG Energy Inc. (NRG - Free Report) recently inked a deal to acquire Direct Energy, the North American subsidiary of Centrica PLC (CPYYY - Free Report) , for a consideration of $3.625 billion, subject to a working capital adjustment. This all-cash transaction is expected to close by the end of 2020, pending customary closing conditions and regulatory approvals.

Notably, Direct Energy is among North America’s leading retail providers of electricity, natural gas, and home and business energy-related products as well as services.

Buyout Benefits

The purchase will likely complement NRG Energy’s integrated model, enabling better matching of power generation with customer demand along with enhancement of its retail natural gas capabilities. Further, the takeover will expose NRG Energy to substantial regional diversity, provided 76% of Direct Energy’s Home Energy customers resides outside Texas. The transaction will add more than 3 million retail customers from all 50 U.S. states and six Canadian provinces.

The buyout is likely to draw $300 million worth synergies annually and nearly $740 million as annual adjusted EBITDA, courtesy of NRG Energy’s scalable operational platform and best-in-class cost discipline. The integration will also strengthen free cash flow and provide earnings diversification.

The deal will offer NRG Energy the ability to expand its successful capital-light renewable Power Purchase Agreement strategy outside Texas and will be accretive to its free cash flow. In addition, the company expects to achieve its targeted credit ratios within 12 months of the deal’s completion, thereby maintaining its commitment to achieve investment grade credit metrics.

Acquisitions Expand Operation

NRG Energy has been making concerted efforts to consolidate earnings, increase cost savings and boost shareholder value. This acquisition is in line with such growth-driving measures. Prior to this, in August 2019, the company acquired Stream Energy's retail electricity and natural gas business, which has operational presence in nine states and at Washington, DC for $329 million. Remarkably, the deal had added approximately 450,000 customers to the company’s retail portfolio.

Price Performance

In the past three months, shares of the company have gained 2.3% against the industry’s 1.2% decline.

Zacks Rank & Key Picks

The company currently has a Zacks Rank #4 (Sell).

A few better-ranked electric utilities are Korea Electric Power Corporation (KEP - Free Report) and Fortis Inc. (FTS - Free Report) , both carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Korea Electric Power’s 2020 earnings has been stable in the past 60 days. The company’s long-term (three-five years) earnings growth rate is pegged at 5%.

Fortis came up with an earnings surprise of 6.28%, on average, in the last four quarters. The Zacks Consensus Estimate for 2020 earnings has been revised 1.6% upward in the past 60 days.

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