(CN) - A shareholder class action seeks to prevent the proposed merger of power companies GenOn Energy and NRG Energy in a deal worth $1.7 billion, which would create the largest competitive power company in the U.S.
Willa Rosenbloom filed a class action against GenOn Energy, 10 of its corporate officers, NRG Energy, and Plus Merger Corporation in Delaware Chancery court.
GenOn is a wholesale power company based in Texas with a total net generating capacity of 22,000 megawatts. NRG Energy, a Fortune 300 company, is a power company with a generating capacity of more than 25,000 megawatts.
On July 22, 2012, GenOn announced it signed a merger agreement with NRG Energy, a transaction valued at $1.7 billion. The proposed merger will create the largest competitive power generation company in the U.S, according to the Wall Street Journal.
However, according to the complaint, analysts have estimated a target price for GenOn stock which is much higher than what NRG offered.
"The Proposed Transaction represents a 20.6 percent premium to GenOn shares, based on their closing price on July 20, 2012, of $1.82 per share. NRG shareholders will own 71 percent of the combined company and GenOn shareholders will own 29 percent after the Proposed Transaction closes," the complaint states. "According to The Wall Street Journal, 'Merchant generators such as NRG and GenOn have struggled against wholesale power prices that plunged to 10-year lows over the last couple of years, owing to a natural gas boom that has driven gas prices to record lows. Natural gas prices have acted as a virtual proxy for power prices, as the commodity has become a leading fuel for power plants.' Thus, NRG is taking advantage of lower natural gas prices to acquire GenOn on the cheap."
The complaint quotes several unfavorable reviews of the proposed merger by analysts. One analyst, Mark Barnett of Morningstar, said, "Despite the market-based premium NRG offered, we think the exchange ratio undervalues GenOn by roughly 14 percent."
"GenOn's shareholders are being asked to assume a significant amount of additional risk for the primary benefit of NRG at a time when natural gas prices have depressed the Company's stock price, all at a paltry premium to themselves," the complaints states.
The class is represented by Seth Rigrodsky, Brian Long and Gina Serra of Rigrodsky & Long.