Mirant Corporation (NYSE:MIR) announced earlier this week that it hired J.P. Morgan to assist it in exploring strategic alternatives, including a possible sale of the company. The company first caught the attention of value investors in January of last year when it emerged from bankruptcy protection. Since then, it has been considered a leading takeover target in the increasingly attractive power sector.

The Making of a Target
Many shareholders also began pressuring Mirant to begin selling off its assets last July in order to improve the company's finances and convert it into more of a pure-play U.S. power producer. Since then, the company agreed to sell its Philippine assets to an investor consortium for $3.4 billion in December. A month later, it sold six natural-gas-fired plants to a New York private equity firm for $1.41 billion. And now, the company is in the process of selling several Caribbean power assets in a $1.1 billion sale that it hopes to close by mid-year.

These transactions left the company with an attractive market position. They also left a significant amount of excess cash that can be returned to shareholders through a buyback or dividend, retained by the company for its operations, or used as incentive for a possible suitor.

Given the average buyout premiums recently, along with the company's openness to a buyout, many traders and investors are watching the last option closely!

The Prospect of a Buyout
Buyout interest among U.S. power producers has been steadily increasing since the power market's collapse spurred by Enron's bankruptcy in 2001. Notably, TXU Corporation (NYSE:TXU) received a $45 billion buyout offer from private equity firm KKR and TPG, that raised valuations for power plant assets and fueled speculation about further acquisitions in the sector. Meanwhile, Pirate Capital and other large shareholders have also been pressuring the company to pursue a sale.

What can be expected from a buyout? Well, the TXU buyout by KKR is the most similar and recent transaction that we can analyze to get an idea of what to expect. KKR's bid for TXU came in at a 15% premium to its prior close at the time and a 25% premium to the stock's average trading price over the previous 20 days.

Recently, TXU also reportedly solicited interest from more than 70 potential buyers and provided detailed financial information to nine of them who were considering rival bids. Using these metrics, along with the company's intrinsic valuation, a buyout would likely value Mirant at around $13 billion or $54 a share or higher.

We also know that there are a number of parties that may be interested in acquiring the company. Many analysts believe that power merchant companies may be the best suitors for Mirant. These strategic buyers could include Dynegy Energy (NYSE:DYN) and NRG Energy (NYSE:NRG) with a third possible candidate being Reliant Energy (NYSE:RRI). The company could also attract private equity groups and banks that have been aggressively pursuing deals in the power sector recently. (For further reading check out, The Wacky World of M&As.)

Overall, Mirant is definitely a company to watch -- excess cash and buyout interests combined with activist hedge funds (like Pirate Capital) pushing for sale of the company can never be a bad thing!

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