Why Vivint Smart Home Stock Is Soaring, And NRG Is Tumbling, Today

© Provided by The Motley Fool Why Vivint Smart Home stock soared and NRG plunged today

What happened?

NRG Energy ( NYSE:NRG ) has agreed to acquire Vivint Smart Home ( NYSE:VVNT ) in a deal valued at $5.2 billion, including debt. The deal sent the two companies' shares moving in opposite directions, with Vivint shares rising about 32% on Tuesday but NRG falling 16%.

So

Based in Houston, NRG is a power generation and utility giant that has long been looking for ways to reduce its dependence on electricity and expand into more consumer markets. Vivint, a maker of smart home products including home security and lighting controls, fits perfectly with this strategy and is providing NRG with more technology expertise to complement its home automation offerings.

In a statement, NRG CEO Mauricio Gutierrez called the acquisition "a revolutionary step toward realizing our vision to be at the forefront of high-tech solutions for homes and businesses.

"Customers want a simple, connected and personalized experience that gives them peace of mind," said Gutierrez. "Vivid's smart home technology powers our retail platform, enhances our customer experience and increases customer lifetime value."

The terms of the deal required NRG to pay $12 in cash for each Vivint share, a total of about $2.8 billion, and about $2.4 billion in debt to assume.

The transaction is a positive market outcome for the Special Purpose Acquisition Company (SPAC). Vivint went public in 2020 through a SPAC merger, and the home purchase price is a 20% premium to the initial offering price of $10 per share.

What about now

The 30% profit is attractive, but it should be noted that the overall initial impression of the deal by the market is not positive. The decline in NRG's stock price means the two companies combined have lost more than $900 million in market value today.

In some ways, the transaction helps NRG diversify its financial profile and make Vivint's subscription-based model more predictable. But this departure from the usual benefits comes with risks, and the deal will increase NRG's debt, at least temporarily, and hurt its cash flow management. The buyers say they expect to achieve the target for an investment-grade credit metric of 2.5 to 2.75 times adjusted net earnings before debt, taxes, depreciation and amortization ( EBITDA ) by late 2025 or early 2026.

It's not unusual for buyers' stocks to fall when a deal is announced, and investors shouldn't view the sale as a referendum on a deal or a signal that it's time to hit the panic button. But with NRG shares up nearly 20% since mid-July before the announcement, some investors appear to have decided to walk away once the merger begins.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool does not have a website for any of the stocks mentioned. The Motley Fool has a disclosure policy.