Dynegy Scrambles to Save Enron Deal

A long weekend of work faced Dynegy Inc. and proposed acquisition Enron Corp., whose worsening stock woes Friday heightened fear that the deal could be renegotiated or collapse entirely.

Enron shares fell 30 cents, or 6%, to close at $4.71 on the New York Stock Exchange. Dynegy shares rose 64 cents to $40.40, also on the NYSE.

Dynegy and its advisors were expected to spend the weekend reviewing rival Enron’s complex books, as both parties race against the decline in Enron’s stock to complete the thorough financial examinations a merger requires.

Houston-based Dynegy on Nov. 9 agreed to pay about $9billion in stock for Enron. But after the 45% drop in Enron shares by Friday’s close, on fears the company could run out of cash before the deal closes, Enron’s market capitalization is only about $4 billion.

At Dynegy’s current stock price, its offer for Enron is worth about $10.85 a share--more than twice Enron’s current share price.

Executives and advisors from both companies are in the final stages of the review, known as due diligence, sources familiar with the matter said. The sources said that renegotiations had not been discussed as of Friday afternoon and that such discussions could not occur until the review is finished.

But should it turn up any more unpleasant surprises that qualify as a “material adverse change” in Enron’s business, the likelihood increases of Dynegy invoking escape clauses or renegotiating, analysts and observers say.

“You’ve got to believe there is that possibility. There is a 90% spread on the deal,” one analyst said. “There’s unquestionably continued malaise in Enron’s core business, and Dynegy has left itself open to renegotiate with Enron.”

Enron spokeswoman Karen Denne said that, to her knowledge, Dynegy was not renegotiating the terms of the acquisition.

She repeated that Enron was working on obtaining an additional $500 million to $1 billion in private equity funding to help shore up the balance sheet.

Dynegy spokesman John Sousa said that due diligence was continuing and that the company remains optimistic about the merger.

Enron’s recent admission that lower volumes at its trading business--the crown jewel of Enron that Dynegy most covets--could cause low fourth-quarter earnings raises the possibility that the trading business is losing its profitability.

Electricity traders said the latest developments are making it seem more likely that Dynegy will renegotiate the deal or back out, a move they said would leave Enron vulnerable to creditors and a possible bankruptcy.

This week, rating agency Fitch Investors said that if Dynegy stepped away from the merger, Enron’s credit situation seemed untenable and a bankruptcy filing was highly possible.

Traders, speaking on condition on anonymity, said they expected Dynegy to scramble over the weekend to narrow the growing share-price gap. Enron’s dropping market value and the shrinking volume in its EnronOnline trading system increase the likelihood that Dynegy could pull out, traders said.

Meanwhile, energy traders reiterated that they would shy away from long-term deals with Enron unless they received substantial assurances the company’s credit rating would soon improve.

Enron’s bonds on Friday were again talked at junk bond levels, but even lower than before.

Enron’s 6.4% notes maturing in 2006 and its 6.75% notes were bid at 57 cents on the dollar, down from a respective 62 cents and 60 cents on Wednesday, according to a trader. The notes yield to maturity a respective 21.5% and 17%. Its 20-year zero-coupon convertible bonds fell about 1 cent on the dollar to just more than 33 cents.