Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of both GenOn Energy (NYS: GEN) and NRG Energy (NYS: NRG) have climbed more than 10% today after news that the two companies would merge. GenOn led the way, jumping as much as 31% in trading today.
So what: NRG is actually the acquiring company and will pay 0.1216 shares of NRG stock to GenOn shareholders for each one of their shares. NRG shareholders will own 71% of the company and GenOn shareholders will hold 29% of the shares. The company will be the biggest wholesale power producer and there is an estimated $300 million in cost savings coming from the merger.
Now what: With GenOn's shares trading at $2.29 and NRG trading at $19.52, there is some arbitrage available because GenOn shareholders will get $2.37 worth of shares. This difference is due to the risk of the merger not going through.
Management says the deal will allow the companies to pay down $1 billion in debt, pay a dividend, and possibly repurchase shares, but management often talks about these benefits in a merger and they rarely come true. With the wholesale market struggling I don't think this makes the new company a great buy and I'd like to see marked improvement in the new company's results before buying shares.
Interested in more info on GenOn Energy? Add it to your watchlist byclicking here.
Interested in more info on NRG Energy? Add it to your watchlist byclicking here.
The article Why GenOn Energy and NRG Energy Shares Popped originally appeared on Fool.com.
Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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