NRG Secures Final Regulatory Nod for LS Power Deal, Yet Valuation and Leverage Risks Remain Elevated

What happened

NRG Energy has received all required regulatory approvals, including from the DOJ, FERC, and New York State, for its $12 billion acquisition of LS Power's natural gas and VPP portfolio, clearing the path for a Q1 2026 closing. This milestone removes a key regulatory overhang that was highlighted as a near-term catalyst in DeepValue's report, potentially boosting investor confidence in deal completion. However, the DeepValue report rates NRG as a 'POTENTIAL SELL' due to its stock trading approximately 32% above a conservative DCF and high pre-deal leverage of Net Debt/EBITDA around 2.9x, exacerbated by this capital-intensive acquisition. The approval does not mitigate execution risks, such as integrating LS Power's assets, managing rising debt, and delivering on large gas build-outs amid volatile demand and competitive pressures. Consequently, while the regulatory green light is a procedural win, it fails to address the core financial and operational vulnerabilities that underpin the bearish stance.

Implication

In the short term, the regulatory clearance may provide a sentiment boost and support stock stability as NRG moves to close the LS Power acquisition on schedule. However, post-close, pro forma leverage is likely to increase, challenging the company's ability to maintain its Net Debt/EBITDA target of 2.5x–2.75x while funding aggressive capital returns and growth projects. Execution on integrating LS Power's assets and delivering on the 5.4 GW gas pipeline will be critical; any stumbles could compress multiples from elevated levels, given the market's pricing of a flawless data-center supercycle. With the stock up 66% over 12 months and trading at rich multiples (e.g., ~21x P/E), the margin of safety is thin, suggesting limited upside unless demand and contract quality exceed expectations. Investors should closely monitor post-close financial metrics, integration updates, and evidence of sustained load growth to gauge whether the premium valuation is justified or if downside risks materialize.

Thesis delta

The regulatory approvals de-risk the deal closure aspect, aligning with management's timeline and reducing a near-term uncertainty flagged in the DeepValue report. However, this does not shift the core 'POTENTIAL SELL' thesis, as concerns over high valuation, rising leverage post-acquisition, and execution risks on gas builds and integration remain unaddressed. The stance remains unchanged, emphasizing that investors should await better entry points or clearer de-risking of financial and operational metrics.