Vistra Announces Energy Harbor Acquisition, Company Split

We plan to raise our Vistra VST fair value estimate by $1 per share after the company announced the acquisition of privately held Energy Harbor for an estimated $5.7 billion, including debt, and a restructuring that will split Vistra into two stand-alone businesses. The transaction doesn’t change our no-moat rating.

The transaction effectively ring-fences Vistra’s nuclear, renewable energy, energy storage, and retail energy businesses from its legacy fossil fuel generation. This is the approach that some European utilities took during the last decade with good success. We expect management hopes to attract more growth capital for its clean energy business, Vistra Vision, at more favorable prices than it could as a combined entity.

This structure sets up the long-run possibility that Vistra could sell its fossil generation assets and effectively become one of the only carbon emissions-free energy companies, similar to Constellation Energy.

We estimate Vistra overpaid for the Energy Harbor assets by about 15%. However, it more than offset that premium with its deal financing structure and potential synergies. Our valuation assumes the company sold a 15% minority stake in Vistra Vision at a value-neutral price. Vistra’s ability to fund the rest of the deal with $3.4 billion of new and assumed debt reduces dilution for shareholders. We assume management realizes 80% of its $125 million projected synergies.

We continue to assume that Vistra’s combined legacy businesses, excluding Energy Harbor, will produce $3.7 billion of EBITDA in 2024. Adding Energy Harbor and our synergy estimate lifts our annual run-rate EBITDA forecast to $4.5 billion, the high end of management’s $4.2 billion-$4.5 billion postdeal guidance range. We assume Vistra Vision and Vistra Tradition each contribute about half of total EBITDA.

The board’s new $1 billion stock-buyback plan approval for 2024 is in line with our outlook and has no impact on our fair value estimate.