COMPANY NEWS: Dynegy to buy Enron in multibillion dollar stock deal

Nov. 19, 2001
Dynegy Inc. agreed Nov. 9 to buy bigger rival Enron Corp. in a stock deal valued at $8.5 billion and to assume $15 billion of Enron debt.

Dynegy Inc. agreed Nov. 9 to buy bigger rival Enron Corp. in a stock deal valued at $8.5 billion and to assume $15 billion of Enron debt. Dynegy predicted the deal will increase its annual earnings growth by 15-20% over the next 3 years.

Separately, BC Gas Inc., Vancouver, BC, agreed to acquire two business units from Westcoast Energy Inc., also of Vancouver, for $208 million (Can.). The acquisition of Centra Gas British Columbia and Centra Gas Whistler Inc. gives BC Gas control of all Centra Gas's Vancouver Island and British Columbia coastal assets.

Dynegy-Enron

Analysts praised the merger of the two Houston companies as a good move for Dynegy; however, Fitch put Dynegy on ratings watch negative following the announcement, indicating the credit rating agency could affirm or lower the rating.

In a shocking turnaround for the one-time Wall Street darling, the Enron name will disappear and the new combined company will be called Dynegy Inc. Chuck Watson, CEO, will head up the new company as CEO and chairman.

"It's amazing," said John Olson, an analyst with Sanders Morris Mundy in Houston. "Dynegy is getting itself a wonderful deal." He estimated Dynegy is buying Enron at about six times earnings or at about 30-40¢ on the dollar.

Ken Lay, Enron CEO, and most of the other senior executives at Enron will not be retained in operating capacities at the combined company. Greg Whalley, Enron's chief operating officer, will become an executive vice-president.

Terms of the transaction call for Dynegy to exchange 0.2685/share for each Enron share. The transaction would value Enron at about $10.41/ share. Merrill Lynch & Co. energy analyst Donato Eassey said the proposal adds a "tremendous amount of value" to Dynegy.

The new firm will combine Enron's core businesses, which were "functioning extremely well," with Dynegy's "much more conservative" management philosophy, Eassey said.

Eassey also said he was "extremely encouraged" because the stock deal formula does not include a collar, meaning the value of the deal can change as Dynegy's stock value changes.

He projected earnings of slightly more than $3/share from the transaction and was pleased to hear the company is projecting earnings of $3.40-$3.50/share in 2002. But he cautioned that Dynegy will have to execute.

Key to the merger is the participation of one of Dynegy's stakeholders, ChevronTexaco Corp., which will give Enron an immediate cash infusion of $1.5 billion to stabilize the trading operation, Watson said. ChevronTexaco owns a 26.5% stake in Dynegy.

At closing, ChevronTexaco will invest an additional $1 billion in equity into the new company. The major oil company also has the right to purchase an additional $1.5 billion in Dynegy common stock for up to 3 years after the merger is completed.

Watson said the combination of the two companies was an "easy" thing to do. "We know each other well. We have exchanged employees over the last 20 years. We have been partners and competitors," he said.

Watson said the new Dynegy would focus on North American and European energy marketing and trading and the pipelines.

Steve Bergstrom, president of Dynegy and also president of the new combined company, said Dynegy will not participate in the small commercial and retail energy markets. But he said Dynegy will retain Enron's emphasis on retail sales to large commercial and industrial companies.

The company will pursue an "asset-backed" strategy, a complete about-face for Enron, which had touted an "asset light" approach for several years. Lay acknowledged Enron's liquidity crisis was hurting the trading operation, forcing the merger discussion.

"Three or 4 weeks ago I didn't expect this [merger] to occur. But it became clear that we needed to strengthen the balance sheet and increase liquidity," said Lay. "We could have tried to stay independent and get a private equity to recapitalize the balance sheet. It became clear that it was best for employees and shareholders for us to merge."

The new Dynegy expects revenue will exceed $200 billion and it will have assets worth $90 billion. Together, the companies had gas sales of 40 bcfd and power sales totaling 500 million Mw-hr through the third quarter of 2001. Watson said he was particularly thrilled to get Enron's 25,000 miles of interstate pipeline.

In its credit rating analysis, Fitch said the action reflected some uncertainty over the ultimate outcome of the company's post-merger credit profile. While the proposed transaction will not require Dynegy to ante up incremental debt financing, the company is likely to assume many of the difficulties which continue to plague Enron, including the need to sell underperforming emerging market assets, the ongoing government investigation of certain off-balance sheet partnerships, and potential litigation from shareholder lawsuits filed against Enron, Fitch said.

The rating agency cited as positive the terms of the transaction that allow Dynegy to terminate the deal in the event of specific adverse material changes, including Enron litigation exposure in excess of specified levels or a drop in Enron's senior unsecured credit rating below investment grade.

The companies had little to say about the cloud hanging over Enron concerning the investigation by the Securities and Exchange Commission into the off-balance sheet transactions. These special entities were at the core of the unraveling of the huge company that was the longtime market leader in wholesale energy trading.

Bergstrom said, "We believe Enron has begun to address these issues in a responsible manner and that they will not detract from the value of Enron's core business."

Neither Watson nor Lay answered questions about the investigation or the controversial transactions.

"We took all that into consideration in the valuation for this deal," said Watson. The deal, expected to be completed in 6-9 months, is subject to customary federal and state regulatory approvals. Watson said he did not expect any significant hurdles in getting the merger approved. He doesn't expect that any assets will have to be sold with the exception of those already reported by Enron.

BC Gas

Upon completion of the deal, BC Gas will control all of Centra Gas's Vancouver Island and British Columbia coastal assets, including 615 km of high-pressure transmission mains and more than 3,000 km of intermediate-pressure transmission and distribution mains.

BC Gas also will assume Centra Gas's $298 million debt. The deal is subject to regulatory approval, but should close by Jan. 1.

Centra Gas provides natural gas to 70,000 homes and businesses and seven pulp mills on Vancouver Island and the British Columbia coast.

John Reid, BC Gas president and CEO, said, "Centra Gas has excellent growth potential, including the expansion of natural gas service to residential and commercial customers and the opportunity to service gas-fired electricity generating plants on Vancouver Island."

Centra Gas Whistler provides piped propane to 2,000 customers in the resort municipality of Whistler.

Westcoast said the sale gives it a positive contribution to net income of $33 million to be booked at close.