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Beth Jinks, Richard Bravo and Mary Childs
(c) 2014, Bloomberg News.
NEW YORK — For those hungry to watch billionaires fight over scraps in the smoking crater of a balance sheet, Energy Future Holdings is a 64-ounce rib eye hanging off the plate.

The Dallas-based energy company will likely file for bankruptcy protection this month. Talks between owners and creditors on how to slice up Texas's largest power provider and avoid a free-for-all in Chapter 11 have been "constructive," Energy Future said March 31. Judging by past performance — talks that dragged on for more than a year — negotiations may yet founder and, even if investors reach a pre-bankruptcy agreement, there's still plenty to squabble over.

Everything about the deal is as big as Texas — biggest leveraged buyout ($48 billion, in 2007), biggest energy bankruptcy (a possible $45.6 billion, bigger than Enron) and a big loss for Henry Kravis, George Roberts, David Bonderman and Lloyd Blankfein, the big shots who bought the company formerly known as TXU Corp. Its tanking resulted from an unprecedented drop in natural gas prices (90 percent peak to trough, June 2008 to March 2012) and the debt they loaded onto the back of Energy Future.

To quote Warren Buffett, whose Berkshire Hathawaylost $873 million on its $2 billion bond investment: "Big mistake."

"Watching the buyout sponsors haggle with creditors for a small slice of the equity is like watching two movie stars get out of a Rolls-Royce and fight over a dime in the gutter," said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor. "The collapse shows that even buyout superstars can fall on their faces when they make highly leveraged investments in volatile businesses. Their brand name and reputation aren't enough to save them."

In the largest buyout of their lives, Roberts and Kravis of KKR & Co., Bonderman of TPG Capital and Goldman Sachs Group's Blankfein — billionaire cousins, a private-equity giant and a titan of Wall Street — may salvage just 1 percent of the original equity investment of about $8.3 billion, according to people with knowledge of the negotiations. And they're about to lose control of most of the company to a pair of other billionaires, Leon Black and Howard Marks.

Black's Apollo Global Management and Marks's Oaktree Capital Management, along with Centerbridge Partners LP, are among the largest creditors. Because the firms are working together to take over a piece of the company, and control similar slices of debt, some negotiators have nicknamed them the Three Amigos.

The biggest roadblock to a pre-Chapter 11 deal this month is the question of who will pay the tax man.

The Three Amigos want to split off Energy Future's different businesses in a way that would favor them while leaving the bankrupt carcass of Energy Future with an estimated $7 billion-plus Internal Revenue Service bill, too large for it to pay, according to people with knowledge of the plan who asked not be identified because discussions are ongoing. Other stakeholders are opposed and vow to fight the plan or even push tax officials to change the rules, they said.

Carissa Felger, a spokeswoman for Oaktree at Sard Verbinnen & Co., declined to comment. So did Charles Zehren, a spokesman for Apollo at Rubenstein Associates Inc., and a spokeswoman for Centerbridge.

Officials of Energy Future's owner firms declined to comment.

KKR, TPG and Goldman Sachs Capital Partners, the investment bank's buyout arm, opened negotiations last year asking to keep about 15 percent of their stake. Now they're willing to settle for substantially less to secure an orderly bankruptcy, according to people with knowledge of the talks.

The firms and their customers will likely watch as most of their $8.3 billion in equity circles the drain, according to regulatory filings and the firms' publicly disclosed writedowns. KKR put up $2 billion and TPG and Goldman Sachs each added $1.5 billion. An additional $3.3 billion came from clients of the firms, and from Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley. The remaining $40 billion used to fund the deal was borrowed.

"It's almost like a divorce," said Marc Gross, a money manager at RS Investments in New York who oversees $4 billion in fixed-income funds, none of them with a stake in Energy Future. "You want the Rolex, I want the Rolex. The Rolex is worth $10,000 but you spend $25,000 in legal fees fighting over it. We can both buy a Rolex for the money we spend on a lawyer but I'm not letting you get my Rolex."

The three owners and their investors have managed to wring some value from the deal. Energy Future paid them about $594 million in fees through September 2013, regulatory filings show. That breaks down to $300 million for advising on their own buyout, management fees totaling $220 million and as much as $74.1 million for consulting on debt deals.

Energy Future said it delayed its annual report, skipped $109 million in interest payments due April 1 and will continue to hammer out a restructuring plan. Adam McGill, an Energy Future spokesman, declined to comment further.

After months of brinkmanship, all the major players are now at the table in resurrected talks, including Boston-based Fidelity Investments. Fidelity is a key player because it holds a total of more than $1 billion of debt in at least seven different parts of Energy Future. Adam Banker, a Fidelity spokesman, declined to comment.

For those scoring at home, on the owners' side, Roberts, 70, has $5.3 billion, good for No. 285 as of April 2 on the Bloomberg Billionaires Index of the richest people in the world. Kravis, his 70-year-old cousin, is worth $5.2 billion, making him the 290th-richest person on April 2, according to the index. Bonderman, 71, has accumulated $2.7 billion, according to Forbes. Blankfein, 59, though not a billionaire, was Wall Street's highest-paid CEO in 2013 with a compensation package of at least $23 million.

On Team Creditor, Black, 62, is worth $6.3 billion, No. 223 in the Bloomberg rankings as of April 2, and Marks, 67, has $2 billion, according to Forbes. Centerbridge co-founders Jeff Aronson and Mark Gallogly aren't ranked on any billionaires lists. Yet.

Energy Future traces its roots back to the 1880s, soon after the invention of the incandescent light bulb. Its units include Oncor Electric Delivery Co., the regulated business that provides electricity to more than 3 million homes and businesses; TXU Energy, a retail electricity seller; and Luminant, Texas's largest power producer, which owns coal mines and 14 generating facilities, including the Comanche Peak Nuclear Power Plant southwest of Dallas.

The October 2007 buyout by KKR, TPG and Goldman Sachs was a bet, using mostly borrowed money, that natural-gas prices would rise. Instead, prices, which set the cost of electricity, have fallen 68 percent since 2008 as the development of hydraulic fracturing created a surge in U.S. gas supplies.

Financing for a voyage through Chapter 11 is already in place, the company said March 31. Generating plants will continue to operate, assets will stay in the company's hands and vendors will be paid, according to the Texas Public Utility Commission and the Electric Reliability Council of Texas Inc. Meanwhile, in court, creditors will battle over how much ownership each of them get in exchange for forgiving debt, and dueling plans may split Energy Future into smaller pieces.

The gig was supposed to go differently for John Young, who was hired to be Energy Future chief executive officer soon after the buyout. Young would have preferred the company strike a pre- arranged bankruptcy deal much earlier, people with knowledge of his thinking said. Consequently, he's been more active trying to make peace in restructuring negotiations than executives typically are in similar situations, the people said.

"The management team has done a really good job," said Peter Thornton, a debt analyst for Montpelier, Vt.-based KDP Asset Management. "It has been impressive watching how well they have done with operations given the constant distraction of an overarching $40 billion debt burden that everyone has been assuming they will default on for years now."

— With assistance from David Carey, Sabrina Willmer and Naureen S. Malik in New York, Mark Chediak in San Francisco and Harry R. Weber in Houston.

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