Dynegy, Enron Stock Prices Get Boost
Investors and analysts applauded the proposed $9-billion merger of Dynegy Inc. and Enron Corp., boosting the stock price of both Houston-based energy companies on Monday even as some experts warned of regulatory hurdles.
Dynegy and Enron executives courted Wall Street by offering assurances that the combined company, to be called Dynegy, would be more financially conservative and easier to understand than Enron has been.
Dynegy Chief Executive Charles L. Watson said the merger would immediately sweeten earnings for the combined company and that he remains “90% certain” that no more nasty surprises will emerge from a continuing internal investigation of Enron’s cloudy finances.
“This is an exciting business combination ... that will fuse two groups of talented, dedicated people who share a passion for their work,” said Watson, who would be chairman and chief executive of the new company.
Dynegy’s stock leaped $5.55 to close at $44.31 on the New York Stock Exchange while Enron’s stock increased 61 cents to $9.24.
The proposed transaction, revealed late Friday after days of rumors, marks an extraordinary humbling of Enron and its powerful chairman and CEO, Kenneth L. Lay. Enron is the world’s largest energy trader, but a loss of investor confidence and a severe cash crunch have pushed it into the arms of a competitor that is one-quarter its size.
Under the deal, Enron shareholders would get 0.2685 Dynegy share for each share of Enron stock. Based on the $38.76 close Friday of Dynegy’s stock on the New York Stock Exchange, the deal valued Enron’s stock at $10.40 a share--or $11.89 a share based on Monday’s close. Dynegy would convert 850 million Enron shares, the company said.
Dynegy said Monday that its deal is worth about $24 billion in all: the $9-billion stock swap and the assumption of $2 billion of preferred stock and $13 billion in debt. Enron would get an immediate cash infusion from ChevronTexaco Corp., which owns nearly 27% of Dynegy, with an additional $1billion to follow when the deal closes.
Enron’s stock fell 80% after a series of disturbing financial disclosures that began Oct. 16 with a surprise third-quarter loss tied to failed investments in water and telecommunications and losses from the termination of some off-balance-sheet partnerships.
Enron also revealed that $1.2billion had been shaved off shareholders’ equity because of those partnerships. The Securities and Exchange Commission launched an investigation into the investment vehicles, and the company fired three executives linked to the partnerships.
An internal investigation led Enron to admit it overstated profit by $586 million, or 20%, going back to 1997.
All those disclosures are unrelated to Enron’s core businesses of energy trading, energy marketing and natural gas pipelines, said Dynegy President Steve Bergstrom, and it is those businesses that Dynegy wants.
“We have had the opportunity to look under the hood of their core businesses and have found no surprises,” said Bergstrom, who would be president of the combined company. Dynegy expects those businesses alone to add as much as 95 cents a share to the combined company’s earnings the first year, and Dynegy has built protections into the deal if more surprises emerge from noncore businesses or off-balance-sheet partnerships, the executives said.
Among the protections: Dynegy or Enron would receive $350 million if the other backs out of the deal; Dynegy can abandon the transaction if lawsuit and financial liabilities exceed $3.5 billion; and if the deal falls apart, Dynegy gets Enron’s Northern Natural Gas pipeline.
The combined company would be leader in all of its primary businesses, Watson said, with revenue of more than $200 billion and assets of more than $90 billion. The new Dynegy would be the world’s largest energy trader and would own 25,000 miles of natural gas pipelines and 22,500 megawatts of electricity generation.
It is that powerhouse role that may give regulators pause, energy and antitrust experts say.
California Atty. Gen. Bill Lockyer has not taken a position on the proposed merger. Dynegy co-owns three power plants in California and Enron controls a portion of the state’s natural gas supply through its pipeline and trading businesses.
