CLIENT ALERT: Please read this special message.

Talen takeover could be big payday for CEO

The Morning Call—Matt Assad and Scott Kraus

Talen Energy stock took a beating in its first year, but in what's become a familiar scenario in corporate America, its struggles will almost certainly translate into a big payday for its CEO, Paul Farr.

Within months of its June 2015 spinoff from PPL, Talen had lost 70 percent of its value and posted a 2015 loss of more than $340 million, but if its acquisition by New York-based Riverstone Holdings goes through, Farr stands to take more than $3.6 million with him on his way out of his CEO office on Hamilton Street in Allentown.

It's the kind of golden parachute that may infuriate residents of the ever-shrinking middle America, but one that is, well, typical, said Wayne Outten, an executive pay expert who has been negotiating golden parachutes for 25 years.

"Sometimes, being in the right place at the right time can be extremely beneficial," said Outten, a partner at New York-based Outten & Golden. "In reality, what's he's getting sounds pretty standard in today's market. It would be unusual if he didn't have something like that in place."

Few would call Talen the right place at the right time over much of the past year.

The power generation company with nuclear, coal-fired and natural gas power plants in seven states spun off from PPL and promptly hit the New York Stock Exchange at $21 a share. But it closed the year with a $341 million net loss, as its stock plummeted to $5.76 in January.   

                                           *           *          *

Talen's falling valuation put it at serious risk of being taken over by a competitor looking to take advantage of its low stock price in an industry where analysts viewed consolidation as the best way to boost profits, setting off six months of rumors that its acquisition was inevitable.

Those rumors came true Friday when Riverstone Holdings, a private equity firm in New York that already had 35 percent of the company's stock, announced it was buying out the rest of the stock at $14 a share and taking the company private.

It remains unclear what the acquisition will mean for the more than 400 workers at Talen's Allentown headquarters or the 3,000 workers at its plants, but it could mean a big payday for Farr, according to a change-in-control agreement filed by Talen with the U.S. Securities and Exchange Commission.

Under the agreement, if he is terminated or departs "for good reason," Farr is entitled to three times his annual salary of $950,000 plus his annual cash bonus, which for 2015 was $761,979. That works out to about $3.6 million. The bonus fluctuates annually based on company performance.

He also would be entitled to any unpaid incentive pay he had earned and full vesting of other contingent incentive compensation based on his length of service, an amount that is difficult to estimate. For 2015, Farr received stock options and restricted stock units valued at nearly $7.2 million.

The deal also gives Farr two years' worth of health insurance and other extended benefits, a lump-sum pension payout based on its actuarial value three years after his departure from the company, and up to $50,000 worth of outplacement services to help him find a new job. 

                                          *           *          *

So if Riverstone doesn't terminate Farr, what constitutes good reason for his departure? If Riverstone cuts Farr's pay or benefits, or reduces his duties in a way that is "inconsistent with his status as an executive officer," he'd be entitled to leave with full severance benefits, according to the company's change-in-control agreement.

The same would be true if Riverstone relocates his office farther than 30 miles from Allentown, say, to New York City.

While it may appear one-sided, Outten noted that change-of-control packages like Farr's are not just corporate giveaways. The deals are put in place, in part, to keep executives from fleeing to their next jobs if the company starts to falter or appears ready to be acquired, Outten said. In addition, the deals are there to entice top executives to take a CEO post they're almost inherently at high risk of losing.

"It keeps the captain at the helm of the ship during times of tumult," Outten said. "In that sense, it's both a golden parachute and golden handcuff."

Outten said the deals are frequently three times salary and bonus because that's the maximum amount allowed by the Internal Revenue Service before it is hit with a hefty excise tax for both the employee and employer.

With the uncertainty of whether Talen will remain in Allentown, Farr's worth to local officials is great, but intangible. Sources have said Farr has been negotiating with the developers of The Waterfront to relocate the company in the city's tax incentive zone along the Lehigh River.

Talen's departure would not only take 400 white-collar workers out of a downtown trying to rebound after 30 years of decline, but it also would damage the $325 million Waterfront project still trying to get off the ground.

                                           *           *          *