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NRG Energy to Buy GenOn Energy

The $1.7 billion deal will create the largest competitive power generation company in U.S.

Princeton-based NRG Energy, less than a decade ago a company emerging from bankruptcy, yesterday announced it had agreed to buy GenOn Energy, Inc. in a stock-for-stock deal worth $1.7 billion.

The merger of the two merchant energy companies will create the largest competitive power generation company in the United States, in a sector troubled by falling wholesale prices for the electricity their plants produce.

If and when completed, the deal will result in a power supplier with a fleet of power plants producing 47,000 megawatts, concentrated in the East, Gulf Coast, and West with a combined value of $18 billion. It will provide enough power to serve 40 million American homes.

“This combination ushers in a new era of scale, scope and market, and fuel diversification in the competitive power industry,’’ said NRG President and CEO David Crane, who will continue in those positions in the new company.

Energy analysts said the deal could produce beneficial synergies between the two companies, but the merger’s success will largely depend on what happens with electricity prices in competitive energy markets.

With natural gas prices falling to near-record lows, the economics of competitive power generation have been fundamentally altered. Natural gas-powered plants have supplanted coal-fired generation as the main source of electricity in the country.

“The real issue confronting the whole sector will be what happens going forward,’’ said Paul Patterson, an energy analyst with Glenrock Associates.

But Paul Fremont, who noted that the deal has been talked about for a long time, said the savings and synergies emerging from the deal do not depend on wholesale energy prices going up.

“I think the deal makes sense,’’ he said. “The advantage is there are a lot of cost savings.’’

Houston-based GenOn has suffered more than NRG because of the fall of wholesale energy prices. In 2007, its shares were trading above $25. On Friday, its shares closed at $1.87 per share. NRG’s shares closed at $18.10 . In a press release announcing the merger, Crane said the combination will put the new company, which will retain the name NRG Energy, in a “uniquely strong position to fulfill the needs of American energy consumers in the 21st century.’’

According to the press release, the acquisition will allow the company to cuts costs and increase cash flow by $300 million in the first year of the deal.

When the deal closes, NRG shareholders will own 71 percent of the combined company and GenOn shareholders will own 29 percent.

In the past, NRG had to fight a hostile takeover by Exelon, one of the nation’s largest energy companies. Rumors of a merger between NRG and GenOn have circulated, too, but its chairman, Edward Muller, had rebuffed the combination, Fremont said.

“The biggest change is the chairman of GenOn became more open to a merger,’’ he said.

By acquiring GenOn, which has a big presence in the PJM Interconnection market, NRG gains a foothold in the nation’s largest regional power grid (including New Jersey), one of the most lucrative energy markets in the country.

“This combination will deliver immediate value to the shareholders of both companies who will benefit from the combined company’s merger synergies, balance sheet efficiencies, increased scale, and additional geographic diversity,’’ said Muller, who will join the NRG Board of Directors as vice chairman.

NRG, which is rolling out the infrastructure for plug-in electric vehicles in Houston and the surrounding county, also has moved into selling green power to consumers through Green Mountain Energy, as well as making big investments in solar power.

The deal is expected to close by the first quarter of 2013.

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