Drax Power's bank debt shot up 10 points to 380 after Constellation Energy and hedge fund Perry Capital put in a £1.9 billion ($3.4 billion) cash bid for the U.K. power station. One trader said the bank debt was pushed up on the expectation that there will be a bidding war for the company.
The £1.9 billion price tag did not impress Drax's board. It said the bid is not equal to the company's enterprise value based on the trading of its A2/A3 debt and equity. Drax's A2 and A3 debt classes shot up 30 points in the past week, and 70 points in the past month. Because of the increase in its bank debt, the company believes it is worth £2.2 billion. In a press release, the board said it will consider any proposal it believes will deliver fair value to its shareholders. It added it will continue to prepare for a refinancing of its debt and a listing on the London Stock Exchange. A Drax spokesman said it plans to convert a portion of its debt to equity by mid to late December.
Constellation and Perry Capital do not think the company is worth more than they are offering. A spokesman for both said the offer price is fair and that the upswing in Drax's bank debt has not increased its value to more than what the investors offered for it. "Just a few months ago, the company was saying it would be worth £1.5 billion in an IPO. Their A2/A3 debt is very illiquid. We don't believe that the recent trades put its value at more than £1.9 billion," said the spokesman.
The trader said the market has anticipated for a while that Drax would receive offers to be bought, helping to bump up its debt price. "The debt has been firing up for months because people have perceived the company as an acquisition target," he said. U.S. funds and hedge funds have been the main buyers of the debt, he added.
Drax Power has come a long way since it collapsed three years ago after power prices fell and its largest customer, TXU Europe, went bankrupt. But the U.K. power market has made a strong recovery. The value of Drax, which is the largest coal-fired power station in the U.K., has grown on the back of soaring electricity prices.
