The firms will join to create a $7.5 billion energy products and services conglomerate. Its operations, mostly in the U.S., will cover a range of sectors, from gas gathering and processing facilities through energy marketing and management services.
"The combined company will be a national leader in the rapidly changing (U.S.) energy industry and will be well-positioned to capitalize on opportunities created by energy convergence and deregulation," the firms said.
The new company will operate under the Dynegy name; it will be based in Houston, although the headquarters of Illinova's Illinois Power subsidiary will remain in Decatur. Dynegy Chairman and CEO Chuck Watson will hold the same positions in the new company. The merger is expected to close by the end of first quarter 2000.
The mergerThe transaction will be accounted for as a purchase of Illinova by Dynegy. It has already been approved by both companies' boards, and Dynegy's industrial shareholders-accounting for 76% of its common stock-also have agreed to vote in favor of the merger.
Under terms of the agreement, a new parent company will be established. This company will acquire all of the shares of Dynegy and Illinova for a combination of stock and cash.
Dynegy shareholders may either exchange each Dynegy share for 0.69 share of the new company or receive a cash consideration of $16.50/share. Illinova shareholders will exchange their shares on a 1:1 basis.
According to the companies, about 60% of the consideration received by Dynegy shareholders will consist of stock and about 40% cash. The cash portion of the deal will amount to about $1.06 billion.
Dynegy's shareholders will own slightly more than 50% of the new company.
Dynegy industrial shareholder Chevron U.S.A. Inc. owns about 29% of Dynegy's stock. Chevron has elected to take all stock for its Dynegy holdings. It also has agreed to invest $200 million of new equity capital in the combined company and up to $40 million more "if required to facilitate a complete monetization of NOVA Chemicals Corp.'s and BG plc's investments in Dynegy."
NOVA and BG each own about 24% of Dynegy. The firms have elected to exchange their Dynegy interests for all cash, subject to proration based on the cash election of Dynegy's public shareholders.
According to NOVA, its cash proceeds from the Dynegy divestment will be $413-550 million (U.S.).
"We're very pleased with the value we expect to derive from the transaction, and we're optimistic the conditions to conclude the sale of our interest will be met," said NOVA Chemicals Pres. and CEO Jeff Lipton. "The terms of the transaction represent an excellent return on our investment, which has a cost base of less than $7/share (U.S.).
"In addition, the proceeds will strengthen our balance sheet and facilitate further investments in our core business."
Combined operationsThe new Dynegy will combine the independent power development and generation businesses of the two partners. In addition, Illinova will bring to the merger its Midwest U.S. generating facilities and a developing national energy services business, while Dynegy will contribute its gas processing and distribution network (see maps).
The new firm will own more than 15,000 MW (gross) of U.S. generating capacity. The partners call the combined power operations "the nation's most geographically diverse generating asset portfolio."
"In addition," said the firms, "Illinova's stable, regulated natural gas and electric utility subsidiary (Illinois Power), with 650,000 customers and retail distribution expertise, coupled with Dynegy's position as the largest marketer of natural gas liquids in the U.S., provide a broader spectrum of value opportunities.
"The new company will be well-positioned to help shape the dynamic changes taking place in the energy marketplace, driven by the restructuring of the power industry and the convergence of the natural gas and electricity industries. Energy convergence provides opportunities to maximize the value of wholesale natural gas and power marketing and trading by leveraging the control and optimization of BTU conversion capacity and other assets."
Watson said, "This merger advances (Dynegy's) strategic plan through the addition of strategically located generation assetsellipseThe combined company will have control over the assets needed to compete across nearly the entire energy value chain-from generation to delivery to wholesale and retail marketing and trading."
Illinova Chairman Charles Bayless says the moves reflect the culmination of Illinova's efforts in recent years to develop its unregulated energy business.
The new Dynegy plans capital outlays totaling $1 billion over the next 5 years, as the company invests in new generating assets. Based on expected combined operations in 2000, about 70% of the firm's earnings and cash flow will come from its non-regulated businesses.
SavingsThe merger transaction is expected to be accretive to both companies' earnings by more than 10% in the first year. Pre-tax cost savings resulting from the merger are estimated at $125-165 million/year.
About two thirds of the total annual savings will come from optimizing Illinova's generating asset portfolio; about one third will be attributable to staff reductions and elimination of duplication.
The companies plan to reduce their combined work force of 6,500 by 5%. This will be done, over time, through reduced hiring, attrition, and voluntary programs, say the firms.
The companies expect to increase profitability by several methods, including:
- Combining assets to create a diversified generation portfolio, in terms of location, production, contracts, and fuels.
- Improving Illinova's supply reliability.
- Expanding Dynegy's marketing and trading operations to Illinova's Midwest customers.
- Marketing Illinova's excess generation capacity.
- Managing both firms' fuel requirements.
- Optimizing Illinova's generation plant operations.
- Implementing a national retail energy and energy services strategy.
- Reducing capital costs.
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