Dynegy walks from proposed Enron buy

By Kathleen Davis, Associate Editor

Dynegy bit off more than it could chew, and has spit Enron back out into a hostile financial environment.

The Houston-based energy company decided to merge with Enron Corp., a hometown rival nearly five times its size on November 9, but on Nov. 28, Dynegy terminated the merger agreement with Enron citing alleged breaches of representations, warranties, covenants and other agreements by the energy Goliath.

The stock for stock merger included $9 billion in equity, $2 billion in stock and $13 billion in debt, and would have been a purchase of Enron by Dynegy. ChevronTexaco, which owns approximately 26 percent of Dynegy’s outstanding common stock, had agreed to invest a total of $2.5 billion, and had already invested over half of the promised funds. In a Webcast November 12, Chuck Watson, chairman and CEO of Dynegy, stated that the $24 billion deal would be “good for our shareholders, good for our employees and good for the entire industry.”

Obviously, those thoughts have changed.

Christopher Ellinghaus, equity analyst for Williams Capital Group, noted a bit of mitigated excitement in the energy industry at the talk of a Dynegy-Enron combo package in the week leading up to the merger announcement.

“When Chuck Watson suggested Dynegy had an appetite for additional acquisitions earlier this year, few people would have speculated that Enron could materialize as a target,” Ellinghaus stated. “Dynegy and Enron are negotiating a merger that would create the largest natural gas and power marketer in the U.S. by a wide margin.”

That merger is now dead, and Dynegy walks away with Enron’s Northern Natural Gas pipeline in exchange for the $1.5 billion cash infusion that ChevronTexaco contributed to the proposed deal.

And Enron may go bankrupt.

Enron’s thrown into reverse

Enron was once a shining energy star. Approximately a year ago, it looked as if Enron could do no wrong. Their stocks were riding at nearly $90 a share, and all was right with their world.

Unfortunately, the end of 2001 will not be a repeat of 2000 for Enron. Their high road began to crumble in mid-October when the swirl of controversy surrounding the actions and sudden departure of former chief financial officer Andrew Fastow began to harshly affect the company’s stock prices.

Fastow was in the middle of a series of financial deals involving limited partnerships that no one seems to fully understand, not even Enron’s board or its investors. The confusion fostered a full-scale investigation by the U.S. Securities and Exchange Commission (SEC), as well as Fastow’s ousting. One thing is for certain, however: Fastow profited from those deals.

In early November, Enron restated their earnings for the years 1997 through 2000 and the first two quarters of 2001 in a filing with the SEC. The 15-odd pages reveal a complicated intertwining relationship between Enron, its affiliates, some officers and the “special purpose entities.” Fastow was a managing partner for one of those off-balance sheet entities and also connected with several other partnerships. The filing stated that Fastow received “in excess of $30 million” relating to his management and investment activities for one of the partnerships.

Kenneth Lay, Enron chairman and CEO, has stated that the company is fully cooperating with the investigation, and Fastow himself has denied any wrongdoing, but Enron’s stocks continue to slide. At press time, Enron has been downgraded to junk bond status with bankruptcy on the horizon.

The ifs, ands, and buts

Dynegy stated that the now-defunct purchase of Enron was based on the value contained in the trading operation, and that there was essentially “no value” in Enron’s other mostly overseas assets.

Financial analysts commented that the ratings agency had held off any downgrades following the merger announcement because they had hoped confidence would return based on the merger news. Unfortunately, such a rebound did not occur.

Standard & Poor’s, Fitch IBCA and Moody’s Investors Service all downgraded Enron to junk bond status. The New York Stock Exchange halted trading of Enron Corp’s stock a little after noon on Nov. 28 on imbalance orders.

“A move by Enron to seek protection from its creditors through a voluntary filing under Chapter 11 of the U.S. Bankruptcy Code is a distinct possibility,” stated Standard & Poor’s.

“I expect they will have to file bankruptcy,” said Andre Meade, analyst with Commerzbank Securities in New York, as Enron was downgraded, but Dynegy’s decision had yet to be announced. “And Dynegy will walk away,” he added.

And just a few hours later, that’s just what they did.

Editor’s note: As this issue goes to print, Enron has filed for Chapter 11 and is suing Dynegy for breach of contract.


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