UBS Warburg to revive Enron trading operation

By the OGJ Online Staff

HOUSTON, Jan. 15 -- UBS Warburg agreed to take over Enron's gas and electric trading operation without paying Enron's creditors any money up front.

Instead, UBS Warburg, the investment banking unit of Swiss-based UBS AG, will pay Enron one-third of the profits generated by the new trading organization after the first year. Enron also will put up the cash for an $11 million bonus to be distributed to the traders at the end of the first year. UBS will determine how to allocate the bonus money, according to the documents filed with the bankruptcy court.

Bidding for the remains of the trading operation, once the crown jewel of Enron Corp., which filed for bankruptcy protection Dec. 2, began last week. Only two serious bidders emerged: UBS Warburg and Citigroup Inc. The results were announced Friday. Paperwork ironing out details of the transaction were made public Tuesday. Enron unexpectedly collapsed after investors lost confidence in the former Houston energy trading giant because of incorrect earnings statements and billions of debt not revealed on the balance sheet.

Louis Gagliardi, analyst with John S. Herold, Stamford, Conn., said winning back lost trading business will be difficult. He added with its worldwide operations, sophistication, and sound credit rating UBS Warburg is in the best position to try to do so.

"Traders won't be reluctant to trade with them because trades will be on UBS standards and codes of conduct and with their cash and credit on the table," he said. Reviving Enron Online and the energy trading business needs to be accomplished quickly before more business is lost to competing trading forums such IntercontinentalExchange or Dynegy Direct, the on line trading arm of Dynegy, Inc., he said.

Gagliardi said it isn't known if Enron's most experienced traders still remain with the company. Because Enron's name is now tainted, Gagliardi predicted UBS Warburg will eventually get rid of it. Calls to UBS Warburg in New York and Enron in Houston were not returned.

Under terms of the deal, UBS can begin buying out Enron's royalty interest in the third year. UBS can exercise these rights in three steps, each representing one-third of the royalty stream, Enron said in a statement. Following the exercise of the first call, the royalty payment rate will drop from 33% to 22%.

After the second call, the rate drops to 11% from 22%. After the third call, all royalties to Enron would stop. Gagliardi said the trading operation should be considered a new entity going forward because none of the existing contracts or liabilities were assumed. The deal is pending approval by the bankruptcy court judge.

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