Mirant and RRI Power Up a $1.6 Billion Merger

MIR and RRI have agreed to a $1.6 billion merger, creating a new company -- GenOn Energy.
MIR and RRI have agreed to a $1.6 billion merger, creating a new company -- GenOn Energy.

Mirant (MIR) and RRI Energy (RRI) have agreed to a $1.6 billion merger and a new name -- GenOn Energy, which will become one of the country's largest independent power producers.

This is the second major consolidation in the electric power industry in 2010, a sign that things could be heating up after a few sluggish years. In February, FirstEnergy (FE) agreed to pay $4.7 billion for Allegheny Energy (AYE) in an all-stock transaction.

The Mirant-RRI deal, also an all-stock transaction, will essentially be a merger of equals. As a result, Mirant will get 54% of the equity, with RRI shareholders getting the remaining portion. What's more, Mirant's CEO, Edward Muller, will serve as the CEO of GenOn until 2013 when RRI's CEO, Mark Jacobs, will take the top spot. In the meantime, Jacobs will serve as the president and chief operating officer.

And yes, Wall Street loves the deal. In Monday's trading, shares of Mirant are up 17% and RRI's stock price is up over 12%.

A New Powerhouse

Mirant operates 11 generating plants that produce enough electricity for 10 million homes. The facilities are also flexible and allow for switching between oil, gas and coal. This helps with the management of rapid changes in prices.

RRI also has an extensive portfolio of plants, which produce up to 14,000 megawatts of capacity.

In combination, Mirant-RRI will have a large footprint with 24,700 megawatts of power and increased geographic scale. The markets will include areas like California, the Northeast and the Mid-Atlantic.

But perhaps one of the most attractive benefits of the merger will be the savings. By 2012, Mirant-RRI is expected to realize $150 million in annual cost reductions, including the consolidation of two headquarters, as well as cutbacks in accounting, human resources and information technology systems, according to the merger presentation.

Room for More Mergers

In the power generation business, deals often run into tough regulatory hurdles. However, the Mirant-RRI transaction should be somewhat easier. After all, there will only be three layers of approval: Federal Energy Regulatory Commission, federal antitrust authorities and New York State Public Services Commission.

So all in all, GenOn is likely to become a reality. And it will certainly be needed. The electric power market is often subject to extreme changes. But GenOn will have a much stronger balance sheet, with $2.9 billion in cash.

If anything, this will be a war chest for further dealmaking. Keep in mind that the power generation industry is still highly fragmented -- with over 250 midsize and large power companies in the U.S.