Description

We believe ENGH is the single most attractive merger-arb opportunity in the market today due to a high gross (13%) and annualized spread (29%), which is reflective of unusual deal dynamics rather than fundamental deal risk. 

As an OTC listed company, ENGH is unbuyable for larger funds as it requires full collateral posted. The transaction has low regulatory risk, a highly motivated buyer, a valuation at the low end of peers and a stock price that never reacted to the deal announcement. 

Simply put, ENGH offers asymmetric upside in a market dominated by volatility. 

Overview: 

On March 6, 2023, Vistra Corp (VST or Vistra) announced an acquisition to buy OTC listed Energy Harbor Corp. (ENGH or Energy Harbor). The transaction will catalyze the creation of Vistra Vision, a new segment with Vistra that will combine Vistra's existing nuclear, retail, renewables and battery storage assets with Energy Harbor's nuclear and retail assets. 

The transaction is a transformative event for Vistra, creating one of the largest clean energy businesses in the country and setting the stage for a potential split of Vistra into a CleanCo (Vistra Vision) and LegacyCo (legacy non-green assets).

VST currently trades OTC at $75/share, full financials / transaction documents are available to ENGH holders with proof of ownership (i.e. sending proof of holding 10 shares to ENGH IR allows data room access). VST’s acquisition announcement, transaction documents and deal deck are public. 

ENGH per share consideration has been reported by investment articles to be $85/share, implying a 13.1% gross spread / 28.6% annualized assuming an October close. 

The transaction has minimal geographic overlap and an estimated transaction value of 6.7x to 7.8x EV/EBITDA, on par with the low range of public peers.  

Why this opportunity exists:

ENGH is a unique asset. The company emerged from bankruptcy on 2/27/2020 owned by distressed funds. ENGH’s May 10, 2020 financial /company overview post-emergence is still available here, while dated this broadly highlights the company’s high quality and defensive characteristics.   

The unique deal structure and OTC listing (which precludes many levered funds/pods from owning the security as full collateral must be posted) has resulted in a wide deal spread despite shareholder support and minimal anti-trust concerns. 

Company:

Vistra is currently the fourth largest owner of merchant nuclear power in the U.S. with a capacity of ~37 gigawatts. Vistra emerged from Energy Future Holdings (TXU Energy) bankruptcy in fall 2016 as a stand-alone independent power producer in the ERCOT market in Texas. The company then expanded, acquiring Dynegy Inc. in 2017 among others. At the time of announcement, this is the largest acquisition for Vistra Energy. Pre-ENGH deal, VST owns GWs of generations across ERCOT, MISO, PJM, ISO-NE/NYISO, and CA-ISO. It also owns a competitive retail electricity business across 19 states, Washington, DC and in markets in Canada and Japan, serving nearly 5 million residential, commercial, and industrial customers through five main retail brands: TXU Energy, Dynegy, Homefield Energy, Ambit, and USG&E.

Vistra Vision is a newly formed Vistra subsidiary that will indirectly combine Energy Harbor’s nuclear and retail businesses with Vistra’s nuclear, retail, renewables and storage businesses.  Vistra will own 100% of Vistra Tradition (convention generation assets) and 85% of Vistra Vision (the nuclear, renewable and retail businesses).

Energy Harbor, formed out of the financial restructuring of FirstEnergy Solutions, is a generation owner and retail energy supplier. ENGH is the second largest owner of merchant nuclear power in the U.S. ENGH develops, owns, and operates electric generating facilities and markets power in competitive wholesale and retail markets. EHNG owns three nuclear generating facilities: (i) the Beaver Valley Power Station in Shippingport, Pennsylvania (1,969 MW nameplate); (ii) the Davis-Besse Nuclear Power Station in Oak Harbor, Ohio (962 MW nameplate); and (iii) the Perry Nuclear Power Plant in Perry, Ohio (1,302 MW nameplate).  Its two largest shareholders are Nuveen (47% of outstanding stock) and Avenue Capital (16% outstanding stock). Both majority shareholders have approved the merger.  

Transaction:

Consideration to acquire ENGH is: 1) $3.0 billion in cash, 2) Vistra Vision assumes ~$430 million of net debt from Energy Harbor, 3) 15% minority stake in Vistra Vision to Nuveen and Avenue Capital (no conversion or put rights).  VST estimates as of Q1’23 (5/9/23) that Energy Harbor will contribute about $900mn to consolidated EBITDA in 2024, up from the previous estimate of $750mn disclosed during the transaction briefing. EBITDA improvement is driven by operational improvements, Vista operates one of the lowest-cost and highest-performing nuclear power plants in the country (Comanche Peak Nuclear Plant, Somervell County, Texas). 

The EV multiple for the Energy Harbor assets has several moving pieces, including the value prescribed to the 15% stake in Vistra Vision. The 15% stake has been valued broadly between $2.7bn and $3.5bn, implying a total EV in the $6 to $7bn range or 6.7x to 7.8x targeted EBITDA of $900MM, a discount to Constellation (CEG) 9x 2024 EV multiple. 

VST expects to close transaction in 4Q23, and subject to customary approvals, including from the Nuclear Regulatory Commission (NRC); the Federal Energy Regulatory Commission (FERC), and the Department of Justice (DOJ) under Hart-Scott-Rodino Act. Commitments for bridge financing are in place and will be replaced with permanent financing prior to close.

Energy Harbor will merge into a subsidiary of Vistra Vision. Vistra will own a controlling 85% ownership interest in Vistra Vision with Nuveen and Avenue Capital rolling their existing stake in ENGH and owning the remaining 15%. 

The proposed transaction will not have any adverse effect on rates or competition nor raise any horizontal merger concerns. VST will continue to be subject to the same jurisdiction as pre-transaction. The transaction will not result in any cross-subsidization of a non-utility company or the encumbrance or pledge of utility assets for the benefit of a third party. 

All of the Energy Harbor generation is located in the PJM market; the only relevant geographic market for the purposes of analyzing any horizontal market impacts. Generation owned or controlled by Vistra affiliates and by Energy Harbor affiliates in PJM:

Anti-trust concerns would be moderate as the transaction involves the acquisition of modest PJM generation facilities in that relative to the overall size of the PJM market. The ENGH transaction represents about 2 percent of total PJM capacity of 181,000 MW of installed capacity. The PJM energy market is generally unconcentrated and transactions in markets that are unconcentrated are presumed to have no anti-competitive impact. Vistra units located in MISO and pseudo-tied into PJM should not be a concern. Until 2019 / 2020 Vistra had units located in MISO (Hennepin, Coffeen, Duck Creek, Newton and Edwards) pseudo-tied into the PJM. However, than Newton facility, each of these plants is now retired and Newton no longer pseudo-tied into PJM. 

Catalyst

Acquistion closure