NRG Energy Inc. plans to acquire smaller rival GenOn Energy Inc. in an all-stock deal valued at about $1.7 billion, creating the largest competitive-rate power company in the U.S.

The combined company would be the largest merchant power generator in the U.S., able to crank out about 47,000 megawatts of electricity, or about 5% of the U.S. total, in a highly fragmented industry.

Merchant generators like NRG and GenOn sell power primarily into wholesale markets, and their fortunes are tied much more closely to the ups and downs of commodity prices than companies like Duke Energy Corp. and Southern Co., which operate utilities in states where regulators oversee rates and investment returns.  The merger plans come as U.S. power-plant operators are struggling with some of the lowest wholesale power prices in a decade thanks to a natural-gas production boom that is putting downward pressure on prices.

By combining, NRG and GenOn hope to eliminate overlapping costs, use their increased cash flow to reduce debt, and expand NRG's retail sales business to new markets. "We're starting a new standard of scale," NRG President and Chief Executive David Crane, who will retain his positions, said. "It will be up to others to compete with us." The deal, which requires approval from federal and state regulators, is expected to close by the 2013 first quarter.

GenOn's shares plummeted from their perch above $25 in the second half of 2008 and never recovered. They closed down 2.7%, or five cents a share, at $1.82 on Friday. Under the merger's terms, GenOn holders will receive 0.1216 of an NRG share for every one of theirs. The deal values Houston-based GenOn's shares at about $2.20 and will give its holders about 21% of the combined company. 

Reference: http://online.wsj.com?mod=djnwires