Negotiation Strategy for EDF
Seung Chul Seo
Chris Sert Yeo
February 24th, 2007
During the negotiation with KKR and TPG (“PE Firms”) on the proposed buyout of TXU, the most significant
opportunity for Environmental Defense Fund, NRDC and its constituents (“EDF”) is the setting of a precedent for
serious representation of environmental concerns in future large buyout transactions. A secondary motivation is the
ability to substantially influence TXU’s corporate environmental policy and make a positive environmental impact.
EDF can potentially gain concessions from the PE Firms worth approximately $3.6 billion that would decrease global
warming pollution, as represented by a reduction of total CO2, Carbon, SO2 and NOx emissions by an estimated 84.5
million tons1 annually. To take advantage of this opportunity, EDF should negotiate a concession package that will
include the following:
Reduction in the number of proposed TXU coal-fired plants
Investment in IGCC technology and/or carbon sequestration programs to reduce emissions
Subsidization of demand management and consumer efficiency programs
Commitment of TXU to explore alternative energy and carbon offset initiatives
Creation of an independent audit committee to ensure increased consideration for environmental factors in
TXU’s business policies
In this memorandum, we estimate that the total economic value of EDF’s blessing of the deal to the PE Firms. Based
on this implied reservation price for the PE Firms, we propose a negotiation strategy that delineates and quantifies a
minimum level of concessions, which if granted will give EDF a reasonable basis to lend its blessing to the deal. We
conclude by recommending a specific negotiation strategy that will facilitate the achievement of EDF’s goals.
Despite our recommended strategy, there is always a potential risk that EDF’s reputation and credibility among fellow
environmental advocates and its public supporters may be compromised for negotiating concessions perceived as
unsatisfactory or worse, considered “sell-out deals”. Also, we have made a number of estimates and assumptions,
based on which the proposed negotiation strategy may not be as effective as projected. However, we are reasonably
confident based on our thorough analysis that EDF can successfully negotiate a set of environmental concessions that
minimizes its reputational risk and achieves its goals.
Economic Value of EDF’s Blessing
EDF must first understand how its blessing creates economic value for the PE Firms at the deal stage and after the
deal has been completed. At the deal stage, EDF can substantially facilitate and hasten regulatory approval of the
deal, thus allowing the PE Firms to realize cash flows earlier. After the deal has been completed, EDF’s blessing
facilitates obtaining the Texas Commission on Environmental Quality’s (“TCEQ”) approval for new plants, reduces
legal and lobbying costs, defers the compliance deadline of future regulatory emission requirements and reduces
customer defections. The combined impact ranges from $2.8 to $4.4 billion, with an average value of approximately
$3.6 billion, shown in Figure 1.
Figure 1 provides a detailed explanation of the cost drivers and the subsequent savings brought on by EDF’s
83 million tons of CO2, 1 million tons of SO2, and 0.5 million tons of NOX based on average emission rates for U.S.
fossil-fuel electricity plants in 1999.
Figure 1: Economic Value of EDF’s Blessing
Value Driver Description of Driver Estimated Value
a) Facilitate • Given the current enormous political and social pressure on global warming and The estimated value
regulatory environmental issues, all regulatory bodies will be hesitant to approve any deal ranges from $47 to
approval of the that might have severe negative environmental impacts. $187 million, with an
deal. • EDF can provide substantial proof that the PE Firms are genuinely interested in average of $96 million
enforcing stricter environmental standards on TXU and thus allow the deal to be for a 1-year faster
approved with greater probability and in a shorter period of time. approval process.
• A faster approval allows the PE Firms to realize TXU cash flows earlier.
b) Facilitate • EDF has filed a lawsuit against TCEQ for a temporary or permanent injunction to The estimated
obtaining TCEQ require TCEQ to follow its own rules and authorizing statutes in its permitting incremental cash flow
approval for process. ranges from $2.7
new plants. • The new plants are supposed to start coming online during summer 2009 and billion to $4 billion,
any delay in obtaining the permits will mean deferred cash flows for the PE with an average value
Firms. of $3.4 billion.
• Based on stakeholder analysis, the probability of permit rejection is
approximately 75%, largely due to EDF. As a result, EDF can facilitate in obtaining
the key permits from TCEQ.
c) Reduce • TXU currently faces environmentally related lawsuits due to its coal power plants: The potential savings
outstanding and Two lawsuits include CleanCOALition and Robertson County vs. TXU, and EDF from current and
future lawsuits. lawsuit vs. TXU for the Sandow coal power plant. future settlements
• Besides these current lawsuits, it is very plausible that other lawsuits will take ranges from $44-$133
place in the near future based on the immense social opposition to the new million, with an
plants. These lawsuits will have to be borne by TPG and KKR as the new owners average of $89 million.
• Based on recent environmental lawsuit settlement values by major utilities, the
expected settlement value for EDF’s Sandow lawsuit could range from $25-$100
d) Reduce • In the past 6 months, TXU is estimated to have spent between $3-$7 million in This reduction ranges
ongoing lobbying for the proposed new coal plants. from $2 to $6 million,
lobbying costs. • This includes a team of 27 executives and 14 professional lobbyists, paid with an average of $3
between $1.4 million and $2.6 million, as well as substantial advertising costs. million for a 6 month
• Bringing EDF on board will substantially reduce future lobbying spend for TXU period.
and the PE Firms.
e) Defer • Given California’s recent ground breaking regulation to reduce carbon emissions The savings range from
compliance of by 25% by 2020, the prospects for similar state and/or federal regulations is $4-$19 million with
future becoming more likely with time. average of $7 million
regulatory • This reduction would be above and beyond the supposed “20% carbon reduction per year of deferment.
emission levels” that TXU has been proclaiming.
requirements. • EDF can help to defer/delay the compliance deadline, which would require TXU
to reduce carbon emissions using advanced technologies like IGCC.
f) Reduce • Given the widespread opposition against TXU’s proposed new coal power plants, The estimated value
customer TXU can expect even more customer defections (above the 17% decrease in ranges from $25-$86
defections. retail sales volume in 2005 vs. 2004) to cleaner power providers. million, with an
• EDF can bring environmental credibility to the PE Firms and reduce customer average of $43 million.
Figure 1: Economic Value of EDF’s Blessing (continued)
3,500 3 13 43
Facilitate Deal Facilitate Reduce Reduce Defer Reduce TOTAL
Regulatory TCEQ Lawsuits Lobbying Compliance Customer
Approval Approval for Costs Deadline Defections
Assumptions a b c d e f
a Improved deal completion period by .5 to 2 years range (with 1 as medium level) based on research on how long recent buyout deals have taken.
b Improved probability of approval by 70 to 80% (with 75% as medium level) based on stakeholder analysis of current permit approval issue.
c Reduced number of lawsuits by 1 to 3 with 2 lawsuits as medium level) based on existing legal situation surrounding EDF and TXU.
d Reduced required lobbying period from.3 to 1 year (with .5 as medium level) based on analysis of lobbying situation.
e Deferred emissions reduction from 10 to 30% for 1 year (with 20% as medium level) based on California’s recent regulation.
f Reduce customer defections by 3 to 10% (with 5% as medium level) based on surveys of customer attitude towards coal power and historic defection rates.
Discount rate of 6% (TXU’s WACC)
Minimum Acceptable Level of Concessions
After determining its estimated economic value to the PE Firms, EDF must estimate a minimum level of concessions
that will allow it to avoid stakeholder backlash and damage to its credibility from various activist groups.
Exhibit 1 in the appendix illustrates the concessions that appeal to the broadest range of stakeholders. Stakeholders
have been divided into two groups: those who do not desire specific concessions but rather wish to see the deal go
through with minimal controversy, and those who oppose the deal and demand specific concessions. Critical
stakeholders to placate are denoted in red, and are those who have the most to gain or lose in the deal and who possess
a significant level of influence. The dependency arrows indicate that placating the general public also results in
placating the TCACC, Senate and House, etc., since these stakeholders are motivated to act primarily on behalf of
From our stakeholder analysis in Exhibit 1, we have determined the following environmental concessions to be
essential, which therefore make up the minimum acceptable level of concessions:
a) Scaling back of eight of the eleven new plants
b) Reducing emissions on new plants through IGCC technology and/or carbon sequestration
c) Funding of demand management programs
d) Commitment to alternative energy
e) Commitment to carbon offset programs
f) Creation of an independent audit committee comprised of key stakeholders, and a new leadership position
dedicated to maintaining dialogue on environmental concerns as a vital component of TXU’s corporate
policies. We recommend that this position be filled by ex-EPA chairman William Reilly, the current senior
advisor to TPG, given his strong environmental leadership track record.
The first three concessions are critical since they are common across all key stakeholders. EDF should avoid
compromising on any of these concessions. The latter three concessions are included because they are common
across the powerful environmental groups, who pose the greatest risk to criticizing EDF for approving a bad deal.
Acquiring these concessions helps guarantee that EDF’s reputation would not be harmed, but in fact be enhanced from
approving the deal. In addition, these concessions are relatively cheap in cost to implement and we are confident they
can be negotiated into the terms with the right negotiation strategy, which is to be discussed later. Together, these six
minimum concessions allow EDF to preserve its reputation while simultaneously achieving a significant positive
Note that although the analysis shows price protection as crucial to key stakeholders, we consider this policy as too
risky for EDF to support in this negotiation, since it does not directly cause a positive effect on the environment.
Therefore, other environmental groups may not be content with this concession.
Figure 2 summarizes the estimated economic costs for implementing each concession. The total estimated cost of the
minimum concessions is $2.5 billion.
Figure 2: Economic Cost of Minimum Level of Concessions
a Scaling back of 8 of the 11 new plants in Texas 1,706
b Creation of program to retrofit and clean up TXU's existing plants in Texas to reduce emissions 548
to standards adopted in California in 2006, or other alternatives
c Funding of demand management programs (home insulation, Energy Star rebates, time-of- 178
use metering, creation of fund based on profits to subsidize customers' efforts to conserve
d Verbal commitment to develop alternative energy programs, such as solar energy, wind 45
energy, or hydropower
e Verbal commitment to develop a carbon offset program 22
f Creation of independent audit committee, and creation of new leadership position dedicated 2
to maintaining environmental stewardship.
TOTAL ECONOMIC COST OF MINIMUM LEVEL OF CONCESSIONS: 2,501
a PV of future cash flows of 8 new coal plants in Texas, with an expected approval probability of 25%
b Mixed used of advanced coal technologies like scrubber and IGCC to achieve 20% emissions reduction
c $200 million fund for customers spent over 3 years
d $50 million spent over 3 years
e $25 million spent over 3 years
f $500k per audit, $100k salary for postion for 3 years
Discount rate of 6%
To begin formulating a negotiation strategy, we create a planning summary, shown in Figure 3. This table identifies
crucial information for each negotiation party, including:
BATNA: Best Alternative to a Negotiated Agreement
Reservation Price: The lowest price at which a given party would be indifferent between accepting the
negotiated deal or walking away and resorting to its BATNA
Target Price: The best-case scenario; the ideal outcome.
Figure 3: Negotiation Planning Summary
EDF PE Firms
•Walk away from deal without providing blessing •Complete the deal without EDF and NRDC’s
BATNA and continue litigation to stop the 8 proposed blessing.
Reservation •Equal to the economic value of EDF’s blessing,
•See Exhibit 2: Negotiation Packages.
Price estimated at $3.6 billion.
•EDF’s blessing of the deal at the lowest
Target Price •See Exhibit 2: Negotiation Packages.
possible economic costs.
•Support from multiple non-market groups, •PE firms are relatively shielded from public
including environmental activists, city leaders, protest and activist groups due to inherently low
business leaders, general public, and the media. profile in the media.
•Increasing trend towards emissions regulation. •Perception of controlling the negotiation process
•EDF has existing litigation against 8 plants in as initiators of the buyout.
progress. •Empowered the environmentalists to participate
•EDF perceived as most business friendly groups. in negotiation. Aware that this is a rare
PE Firms unlikely to receive blessing from other opportunity for environmentalist groups to
groups if EDF does not cooperate. redress grievances.
•Limited information available due to last minute •Anticipated negative image from owning a
invitation. publicly denounced firm.
Weaknesses •Represents a broad consortium of interests, and •Little known experience with environmental
therefore is unlikely to fully satisfy all opposition of comparable proportions -
stakeholders. uncertainty about outcomes.
The planning summary reveals vital information that 1) EDF has a relatively strong BATNA, being in a position to walk
away from the deal and continue its litigation to stop eight of the eleven plants, while 2) PE Firms have a relatively low
BATNA, since they would not likely be able to create comparable economic value through other environmental groups if
EDF chooses not to bless the deal.
We also know the following: from the previous section, we estimated the economic cost of the minimum concessions for
the PE Firms to be $2.5 billion. Since the economic value of EDF’s blessing is estimated at $3.6 billion, there is significant
quantitative support that EDF possesses considerable negotiating leverage. This range of negotiation is shown in Figure 4.
Figure 4: Negotiation Bargaining Zone
EDF’s Reservation Point:
= Economic Cost of Minimum Concessions EDF’s Target Offer
~ $2.5 billion
PE Firms’ Target Price PE Firms’ Reservation Point
= Economic Value of EDF’s Blessing
Equipped with this information about the negotiation parties and the bargaining zone, we can formulate a set of effective
negotiating tactics. Figure 5 below details the proposed tactics. In summary, EDF can capitalize on its considerable
negotiation leverage established by its higher relative BATNA and the calculated bargaining zone.
As the negotiation continues, EDF can present three Multiple Equivalent Simultaneous Offers (“MESOs”), which represent
viable compromise packages that fall within the bargaining zone. Exhibit 2 in the appendix shows the six main issue areas,
weighted by relative importance, and details the three potential MESOs that by definition all yield equal value to EDF.
Based on our estimated probabilities of the PE Firms accepting each individual concession shown in Exhibit 2, we can be
fairly certain that the PE Firms will be willing to negotiate on at least one of the MESOs. In the unlikely chance that all
MESOs are rejected, EDF can resort to negotiating towards its minimum level of concessions (its reservation price).
Figure 5: Negotiation Tactics
1) Make the first offer
•Set a tone that EDF must be taken seriously during the negotiations.
•Propose high target price that anchors discussion in EDF’s favor.
•Rationalize aggressive offer - if EDF loses its credibility, it loses
2) Build a “spirit of agreement” with compatible issues
•Ask for the creation of independent audit committee, and a new
leadership position at TXU to maintain the dialogue on environmental
concerns as a vital component of TXU’s corporate policies.
•These concessions require little cost to implement for TXU while providing
instant economic value, and are therefore compatible to both EDF and KKR.
3) Negotiate while maintaining the upper hand
•Repeatedly hint at EDF’s strong BATNA, which is walking away, preserving
its reputation and continuing the litigation to stop eight of the plants.
•Actively manage PE Firms’ perception of their less attractive BATNA.
Without EDF’s blessing, they are likely to complete the deal without any
environmental groups’ support.
4) Present equivalent offers
•Suggest 3 Multiple Equivalent Simultaneous Offers (MESOS) with same
relative value known to EDF but not known to PE Firms.
•MESOs signal cooperation by presenting multiple options for the PE Firms,
as well as help gather information about their relative priorities.
5) Close the deal
•If the PE Firms select an MESO package, EDF can frame the situation to
appear that it is making a “concession” when in fact EDF is not.
•At this point, EDF should have all the information it needs from KKR to
negotiate a middle ground that satisfies both parties’ reservation prices.
EDF can seize this opportunity to influence TXU’s corporate environmental policy and set a precedent for serious
representation of environmental concerns in future large buyout transactions. The total economic value of EDF’s blessing
of the deal to the PE Firms is approximately $3.6 billion. Through its negotiations with the PE Firms, EDF can gain
environmental concessions from TXU worth up to 84.5 million tons annually in reduced emissions that would decrease
global warming. EDF should conduct the negotiation knowing its quantified minimum level of concessions, which if
granted will give EDF a reasonable basis to lend its blessing to the deal. By following the proposed negotiation strategy,
EDF will maximize its chances of achieving its desired environmental concessions at the negotiating table.
Exhibit 1: Stakeholder Analysis and Concession Mapping
Motivations Concessions Desired
GROUPS OPPOSED TO CURRENT DEAL (WANT CONCESSIONS)
• Preserve own credibility • Fewer plants overall
• Maximize positive environmental • Reduction of harmf ul emissions /
impact “Cleaner” technologies
EDF High High
• Establish model f or including • Demand management programs
environmental concerns in large • Alternative energy / Carbon of f sets
buyouts • Audit committee / New leadership
• Energy ef f iciency in the home • Same as that of EDF, but esp.
NRDC High High
• Reduce global warming demand management programs
• Same as that of EDF, but less
RAN / Sierra Club High Medium • Overall protection of environment
Other Activists • Same as that of EDF, but less
High Low • Overall protection of environment
(CleanCOALition, etc.) compromising
• Fewer plants in proximity to towns
• Clean air / Health concerns • Reduction of harmf ul emissions /
General Public High High
• Cost of electricity concerns “Cleaner” technologies
• Lower prices / Price protection
Texas Clean • Fewer plants in proximity to towns
Air Cities High Medium • Meet the needs of constituents • Reduction of harmf ul emissions /
Coalition “Cleaner” technologies
Senate / • Meet the needs of constituents
Medium High • Same as that of citizens
House • Gain visibility when big issues arise
• Ensure adequate supply of energy
• Lower prices / Price protection
• Avoid price shocks and blackouts
PUCT Medium Medium • Demand management programs
• Plants abide by Clean Air Interstate
• Audit committee
Rule and Clean Air Mercury Rule
• Support the common people in big
Celebrities Medium Low • Same as that of citizens
Industry • Create / maintain image of being a
Low Medium • Same as that of citizens
Business responsible business
GROUPS IN FAVOR OF CURRENT DEAL (BUT WANT DEAL TO GO THROUGH WITHOUT CONTROVERSY)
• Maintain long-term prof its
TXU High High • None specif ic
• Avoid f uture harmf ul legislation
KKR / TPG High High • Maximize value of buyout • None specif ic
• Suf f icient electricity supply to meet
State of Texas demand
Low High • None specif ic
(Governor’s Of f ice) • Minimal controversy, do not want to
get sued again
Financial companies • Minimal controversy, do not want to
Low High • None specif ic
(Funders) be targeted by activists
• Minimal controversy (harmf ul f or
High Medium • Avoid f uture harmf ul regulations • None specif ic
• Maintain high electricity prices and
Exhibit 2: Negotiation Packages
EDF NEGOTIATION PACKAGES - RESERVATION, TARGET, & MULTIPLE EQUIVALENT SIMULTANEOUS OFFERS (MESOs)
Probability Reservation Offer Target Offer
Issue Options of PE Firms' Weight (Minimum Level of (Starting Point for MESO1 MESO2 MESO3
(1 - lowest
Acceptance Concessions) Negotiations)
100 - highest)
5% 100 30
Elminate new coal-fired plants across nation
Eliminate the 11 new plants in Texas 30% 60 18 18
Scale back plan, stop 8 of the 11 new plants in
80% 45 13.5 13.5
Establish company-wide agreement to reduce
5% 100 20 20
emissions by 20% from all plants from current
Retrofit existing plants in Texas to reduce 20% 70 14
emissions by 20% from current levels by 2015
Reduce harmful emissions in new plants by 20%
through IGCC technology and/or carbon 90% 30 6 6
Sets aside $500 million to fund progams 40% 75 11.3 11.25
Sets aside $300 million to fund progams 65% 45 6.75 6.75
Sets aside $200 million to fund progams 90% 30 4.5
Sets aside $200 million to fund progams 25% 40 4 4
Sets aside $100 million to fund progams 60% 20 2
Verbal commitment to explore alternative energy
98% 10 1 1
Sets aside $200 million to fund progams 25% 30 3 3
Sets aside $100 million to fund progams 60% 20 2
Verbal commitment to develop a carbon offset 98% 10 1 1
Audit / Leadership
Create an independent audit committee
comprised of various key stakeholders.
Also create a new leadership position dedicated
95% 50 7.5 7.5 7.5 7.5 7.5
to maintaining dialogue on environmental
concerns as a vital component of TXU’s corporate
33.5 75.8 50 50 50