Dynegy jumps into telecom with Extant purchase

Kate Thomas
OGJ Online

Dynegy Inc. Chairman Chuck Watson has been saying, in effect, "watch me" now for months, in promising to unveil the energy merchant's telecommunications strategy, while Enron Corp., Williams, and El Paso Energy Corp., among others, forged ahead in what analysts suggest will be an even bigger market than power.

Watson finally put his cards on the table Wednesday reporting Dynegy plans to acquire Extant Inc. a privately-held startup communications company, for $60 million in cash and 1.25 million shares of Dynegy common stock.

Based on Tuesday's closing stock price of $74/share, the deal's total value is about $152.5 million. Aurora, Colo.-based Extant is valued at $188 million.

Upon closing, which is expected by the end of the third quarter, Dynegy will establish Dynegy Global Communications. The new division will own 80% of a limited partnership to be named Dynegy Connect that will pursue other communications opportunities.

Dynegy Chairman Chuck Watson said in a telephone conference the acquisition will establish the energy company's credibility in the telecommunications market, serve as an entre into broadband origination and marketing, and be a stepping stone to bandwidth trading.

"We still believe the market won't be liquid enough to trade for another two to three years," Watson said. As the market develops, Dynegy will have a network of physical assets in place the trade around. "This fits very well with the model Dynegy has used for 15 years," he said.

Market Opportunity
Dynegy brings an understanding of deregulating markets to the combination and Extant, the intellectual capital and technical understanding of the industry, he said, which is expected to total about $400 million by 2005, or twice the size of the power industry.

"That is a market that Dynegy cannot ignore," Watson said. Purchasing Extant was cheaper than attempting to build a network from scratch as other energy companies are doing, he explained.

Extant chairman and industry veteran Larry McLernon, who will become executive vice-president of Dynegy and CEO of Dynegy Global Communications, said the deal with Dynegy was struck after the "market meltdown" for concept company initial public offerings. He said Extant, founded in 1999, presently has 40 software and transport customers.

Extant had previously announced plans to own or control a broadband data communications network and establish an internet-based clearinghouse service between competitive and incumbent local exchange carriers in major US markets. That plan will now serve as the major focus of Dynegy Connect, the company said.

Extant's network has been deployed in 28 US cities and 40 cities are expected to be operational by yearend. More than 100 cities are set to be fully deployed by 2003. Upon completion, the joint venture network will consist of approximately 80,000 fiber miles and 20,000 route miles.

Dynegy Connect will invest about $400 million to complete development of the fiber network and optical switched mesh networks that permit connections between existing legacy telecommunications systems and more recent technology.

Dynegy chief financial officer Rob Doty estimated the investment will pare the company's earnings by 10-15� this year and 5-10� in 2001. He added, however, Dynegy still expects to achieve current earnings forecasts for this year of $2.63/share and beat analysts' consensus earnings forecasts of about $3.05/share in 2001. Doty said he expects the acquisition to contribute to net income in the second quarter of 2002.

Australian telecommunications and information services company Telstra Corp. Ltd. owns a 17%interest in Extant and will have a 20% stake in Dynegy Connect, Dynegy said. The managing director of Telstra's global wholesale business, John Hibbard, said Dynegy's acquisition of Extant validated its investment.

"We saw the value in Extant's unique data clearinghouse operation, which compelled us to invest in the business," he said. "We are now delighted to be part of Dynegy Connect's plans for expansion as they are closely aligned with our own ambitions for regional and global connectivity.''