By Felix Hooper, Gonzalo Riera-Ripoll, Rafi Glass and Yana Zharkova (Durham University) and Nishil Lakhani, Jack McGing, Frangiskos Kapatos and Dhruv Kotecha (University of Nottingham)
Photo: R Architecture (Unsplash)
Overview of the deal
Acquirer: NRG Energy
Target: Vivint Smart Home
Implied Equity Value: $2.8bn
Total Transaction Size: $5.2bn
Closed date: December 5, 2022
Target advisor: J.P. Morgan (Financial), Simpson Thacher & Bartlett LLP (Legal)
Acquirer advisor: Goldman Sachs (Financial), White & Case LLP (Legal)
NRG Energy has agreed to acquire Vivint Smart Home for $2.8 billion in an all-cash transaction valued at $12 per share. NRG Energy is a top energy provider serving millions of customers in the United States, and Vivint Smart Home is a leading smart home platform enhancing customers' lives with efficient, safe, and technologically advanced products and services for their homes. The acquisition, approved by the boards of both companies, accelerates the realisation of NRG’s consumer-focused strategy of strengthening its retail platform, making it the leading essential home services platform; this in turn will improve its customer experience and customer lifetime value. The acquisition will also improve and diversify NRG’s financial profile, while also expanding the total market opportunity available to NRG. The combined company will have approximately 7.4 million customers across North America, helping drive its unique end-to-end ecosystem with unparalleled data and insights.
“The acquisition of Vivint is a transformational step in achieving our vision. Customers want simple, connected, and customised experiences that provide peace of mind… I am excited to welcome Vivint to the NRG family.” - Mauricio Gutierrez, CEO (NRG Energy)
Company Details (Acquirer - NRG Energy)
NRG Energy is a leading energy company based in Houston, Texas, with a long history of growth and innovation in the energy industry. It operates a diverse portfolio of power generation facilities, including nuclear, coal, natural gas, and renewable sources such as wind and solar, helping millions of households and businesses across the United States have access to clean, reliable and low-cost energy. The company is also committed to sustainability and reducing its carbon footprint, and has set a goal to achieve net-zero carbon emissions by 2050.
Founded in 1989, headquartered in Houston, Texas
CEO: Mauricio Gutierrez
Number of employees: 6,635
Market Cap: $8.0bn (as of 08/02/2023)
EV: $16.0bn
LTM Revenue: $31.5bn
LTM EBITDA: $3.1bn
LTM EV/Revenue: 0.5x
LTM EV/EBITDA: 5.1x
Company Details (Target - Vivint Smart Home)
Vivint Smart Home is one of the leading smart home technology companies. It offers a variety of smart home and security systems that can be installed at home, primarily in the US and Canada. It has been collaborating with companies such as Airbnb and Google over the recent years. As of March 31, 2021, its smart home platform had approximately 1.9 million subscribers and managed approximately 26 million in-home devices. It markets its products through direct-to-home and inside sales channels.
Founded in 1997, headquartered in Provo, Utah, US
CEO: David Bywater
Number of employees: 11,000
Market Cap: $2.6bn (as of 07/02/2023)
EV: $5.0bn
LTM Revenue: $1.6bn
LTM EBITDA: $91.8mn
LTM EV/Revenue: 3.1x
LTM EV/EBITDA: 54.8x
Projections and Assumptions
Short-term consequences
NRG’s acquisition of Vivint Smart will aim to realise several synergies between the two companies in the short term. Primarily, NRG will have immediate access to Vivint’s 1.9 million existing subscribers in North America, providing the energy company a host of new consumers to tap into and thus providing cross-selling synergies in the immediate short-term. The combined entity will serve over 7.4 million customers across North America. Similarly, this deal will allow NRG to continue to focus on becoming an increasingly consumer-services focused company; the addition of smart home services will be an extension of this transformation, allowing NRG to build more value-add product offerings over time.
By acquiring Vivint, NRG aims to capitalise on the growing demand for smart-energy solutions, expanding its current offering that already includes products such as the MyNRG Mobile App, as well as residential and business smart energy systems. Moreover, given Vivint’s subscription-based model and long customer tenure (9 years), it will allow NRG to maintain predictable earnings over the foreseeable future.
However, the fact that $2.8bn of the transaction value is funded by debt may decrease NRG’s credit rating and potentially reduce the chances of issuing any further loans in the short term. This may explain why NRG’s share price dropped by 16% on the day of the announcement, despite the fact that the company will have potentially more stable revenues in the long term. This acquisition brings NRG one-step closer to its goal of creating a stronger, more sustainable end-to-end ecosystem for its customers.
Long-term Upsides
The acquisition aligns with NRG Energy’s strategic vision, diversifying away from power operations and instead aspiring to become the preeminent supplier of home and business services, which Vivint Smart Home’s retail platform will facilitate. Vivint’s technology, for example, will have many applications for NRG’s existing energy customers, such as reducing their energy expenditure or increasing the security of their property through Vivint’s home-protection products. The combined company will boast a customer base of 7.4 million people across North America, constituting a vast swathe of consumers to whom NRG Energy can present these market-leading products. As such, Vivint’s integrated systems will help NRG Energy penetrate a competitive market in a way that NRG would independently struggle to achieve.
The acquisition also aligns advantageously with NRG’s recent transaction activity, having already acquired Direct Energy, Xoom and Stream. The successful integration of these companies into NRG’s business model bodes well for the future of the NRG-Vivint acquisition, demonstrating a precedent of adept realisation of synergies. Additionally, in utilising the data of each company, the combined entity can leverage a greatly enhanced insight into consumer experience, tweaking this when necessary. Finally, the acquisition has the added benefit of improving and diversifying NRG’s financial profile, a consequence of Vivint’s subscription-based business model providing steady and predictable earnings.
Risks and Uncertainties
From investors’ point of view, there have been some concerns that the large amount of capital needed to finance NRG Energy’s $2.8 billion acquisition could have been allocated elsewhere, such as toward share buybacks. However, CFO Alberto Fornaro said ‘the deal will not affect company plans to fully execute its $1 billion stock buyback.’
Furthermore, concerns regarding the financing of the transaction may present a risk to the company’s credit rating. The company plans to fund the deal with high levels of debt: $900 million from NRG’s revolving credit facility and $1.4 billion in new debt and preferred equity. Although, as stated by NRG’s CFO, ‘based on conversations with rating agencies this transaction will not have a material negative impact’.
However, since the announcement of the transaction, S&P Global has placed NRG’s credit rating on credit watch negative amid concerns over the execution risk of the transaction. This concern is due to the combination of high levels of debt and the current potentially recessionary macroeconomic environment.
Another risk that arises from the transaction is whether NRG’s plan to cross-sell and bundle both companies’ energy and home products will be successful. While NRG and Vivint do overlap geographically, it remains to be seen whether NRG’s cross-selling strategy can be pulled-off. More broadly, there are risks around NRG being able to develop a congruent strategy between energy and home security in the longer-term.
“We are pleased to announce a transaction that delivers immediate and compelling cash value to Vivint’s stockholders while also presenting significant opportunities to drive our company’s continued success in the years to come. We look forward to working with NRG to create exciting opportunities for Vivint as part of a larger platform.” - David Bywater, CEO (Vivint Smart Home)