🔑 This $44 billion deal failed in just a few years
Welcome to The Business Buying Academy with Sieva Kozinsky. Here's what we have in store for you today:
- This $44 billion deal failed fast
- A daycare for sale in Phoenix
- How to roll-up software businesses
🔑 When leverage fails
What happens when a massive bet goes horribly wrong?
Today we're going to walk through a disaster of a deal - one that still haunts private equity.
In 2007, a group of investors executed the largest LBO in history (at the time), acquiring TXU Energy.
KKR, TPG Capital, and Goldman Sachs bought TXU, a utility provider, for $44.3 billion
The deal, heavily debt-financed like most LBOs, was a big bet on rising energy prices and deregulation in Texas’ electricity market.
Rising energy prices = Higher profits for utilities.
But that plan didn't work out.
This deal is a cautionary tale of over-leverage and misjudged market dynamics, ending in bankruptcy.
Summary of the deal:
- Target: TXU Energy, a dominant Texas utility with power generation, retail electricity, and transmission operations.
- Value: $44.3 billion, with $8 billion in equity and over $36 billion in debt.
- Buyers: KKR, TPG Capital, and Goldman Sachs’ private equity arm.
- Context: The deal occurred at the peak of the pre-2008 financial crisis buyout boom, fueled by cheap credit and optimism about energy markets.
- Strategy: The investors aimed to capitalize on TXU’s stable cash flows, expecting rising natural gas prices to boost profitability in its coal- and gas-fired plants. They also planned operational efficiencies and market expansion in Texas’ deregulated energy market.
Outcome:
- Market Miscalculation: The deal’s success hinged on rising energy prices. But it couldn't have been worse timing. The fracking boom flooded the market with cheap natural gas, slashing electricity prices and TXU’s revenues.
- Debt: The massive debt load became unsustainable as cash flows dwindled. Interest payments overwhelmed the company, despite cost-cutting efforts.
- Bankruptcy: In 2014, Energy Future Holdings filed for Chapter 11 bankruptcy with $49.7 billion in liabilities. The restructuring wiped out nearly all equity value, costing the PE firms billions.
- Legacy: Partial recoveries occurred through asset sales (such Luminant and TXU Retail to Vistra Energy), but the deal remains a landmark PE failure.
The TXU LBO is a textbook case of private equity hubris and the dangers of leverage.
I've talked many times about the importance of margin of safety when buying a business.
Many investors only focus on the growth case when buying a business. But what happens when you have a bad first year and revenue drops 20%?
Ask yourself:
Will you have enough margin for error to weather the storm and figure out how to get the company back on track? Or will everything come crashing down thanks to massive debt payments?
🔑 Off-Market Childcare & Early Learning Center
Not every deal makes it to the open market. This childcare and early learning center has been part of the Phoenix community since 2002, serving families for over two decades.
With ~$2.5M+ in revenue and ~$1.5M+ in earnings, it’s a steady cash-flow business in a sector where demand doesn’t go away. The center’s reputation is long-established, and for the right buyer, there’s upside in modernizing operations, refreshing marketing, and expanding enrollment.
Why this stood out:
- Established brand: Two decades of operations and a trusted name in the Phoenix community.
- Essential service: Childcare demand is steady and resilient through cycles.
- Prime location: The Phoenix MSA is one of the fastest-growing regions in the country.
- Upside potential: Modernize ops, refresh marketing, expand enrollment.
If you want more details about this deal, set up your buyer profile on Mainshares and get matched with off-market deals that fit your search.
This message is not investment advice. Do your own research before allocating capital. Thanks to our sponsor, Mainshares, for supporting thoughtful small business investing.
🔑 Here's how you can buy a business
I chatted with Brian Wolfe, an expert on M&A from all levels - he worked as a partner at a big law firm for 17 years, helping to close huge deals.
Now he's in the world of ETA (entrepreneurship through acquisition). He helps searchers get started, and he's bought some businesses himself - including a rollup of marketing SaaS businesses.
Brian gave me a masterclass on buying businesses.
Have a great day,
Sieva
P.S. - Are you hiring? Get started with top global talent from Somewhere (I'm a customer and investor)
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
