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Dynegy's Sale to Blackstone Ends Slide by Company That Tried to Buy Enron

By Katarzyna Klimasinska - Aug 13, 2010

Dynegy Inc., the power company whose market value peaked near $20 billion before it tried to swallow up Enron Corp. in 2001, ended its spiral down by agreeing to a buyout by Blackstone Group LP worth about $540 million.

Blackstone agreed to buy Houston-based Dynegy for $4.50 a share, the seller said today in a statement. The price is 62 percent higher than the eight-year low that Dynegy closed at yesterday. The power producer tried to buy Enron for about $23 billion nine years ago in a deal that unraveled before the world’s largest energy trader collapsed.

How Dynegy’s value slid so far, including a 94 percent drop in the past three years, stems at least partly from a debt load that left the company with few options in a slumping economy that dragged down power prices. Among independent U.S. power producers, only Calpine Corp., which has cleaner-burning plants and lower pollution costs than Dynegy, has risen this year.

“They’re several notches below investment grade, there is no free cash, the cost of capital is high and it’s a very difficult spiral that they were in,” said Gordon Howald, an analyst at East Shore Partners Inc. in New York. “Certainly, it didn’t look like there was any way for them to get out of that.”

Independent producers that trade power in wholesale markets don’t have the price stability that benefits utilities, which lock in rates with regulators to ensure returns on investment. Dynegy had $121 million in environmental capital spending in this year’s first half, during which the company had a $46 million loss.

‘Difficult Business’

“The independent power producers’ industry is just a very, very difficult business,” Howald said.

Prices fell by almost a half over the past two years in PJM, the largest U.S. power market, as demand slumped and costs for natural gas, the No. 2 U.S. generation fuel, declined.

Calpine, the largest independent power producer by market value, exited bankruptcy protection in 2008, and Princeton, New Jersey-based NRG Energy Inc. exited bankruptcy in 2004. Mirant Corp., an Atlanta-based power producer, completed its bankruptcy reorganization in January 2006.

Dynegy billed itself as an energy superstore back in 2000, when the company generated almost $30 billion in revenue trading in gas, power and other commodities. It had power projects from Costa Rica to China. The company’s revenue slid to $2.47 billion last year and to only $239 million in the latest quarter, when utilization of its so-called combined-cycled plants dropped to 17 percent in the Western U.S.

Trading Collapse

Enron’s bankruptcy spurred a collapse in energy trading that pushed Dynegy’s debt ratings below investment grade. Bruce Williamson, who took over as chief executive officer in 2002, spent his first years on the job selling pipelines to avert bankruptcy and focused the company exclusively on producing and selling power in the U.S.

Williamson, who declined to be interviewed for this article, said last year that he expected profits to start growing in 2011, as the economy recovered. At the time, in an April 2009 interview, he said difficulties building new power plants in the U.S. would drive up the value of Dynegy’s assets.

NRG, which agreed to buy four of Dynegy’s properties from Blackstone and a Texas power station from Kelson LP, is paying about 40 percent to 50 percent of what it would cost to build the plants, Houston investment bank Tudor Pickering Holt & Co. said today in a note to clients.

Blackstone, the world’s largest buyout firm, may be betting that it can sell Dynegy’s other assets at a profit over the next few years as industrial power demand recovers, said Daniele Seitz, an analyst at Dudack Research Group in New York.

Stock Tumbled

The Blackstone deal is priced 66 percent below Dynegy’s 52- week high of $13.35, reached in October. Since announcing a 1- for-5 reverse stock split on April 2, Dynegy had plunged 55 percent before today.

“If you look where the stock and credit-default swaps were trading, they were trading at bankruptcy levels,” said Peter Lobravico, vice president of merger arbitrage trading and sales at Wall Street Access in New York. He said shareholders will probably support the deal because “it’s the alternative to a bankruptcy where they would get zero.”

Dynegy jumped to $4.50, matching the takeover price, at 3 p.m. in New York Stock Exchange composite trading. New York- based Blackstone dropped 3.6 percent to $10.61.

Blackstone also agreed to assume Dynegy’s debt, bringing the acquisition’s total value to about $4.7 billion, the firm’s biggest deal since its purchase of Hilton Hotels Corp., announced in 2007. The Dynegy takeover is contingent on Blackstone’s closing the asset sale to NRG at the same time. Dynegy said the sale agreement gives it 40 days to solicit alternative offers.

Dynegy said it was advised by Goldman Sachs Group Inc. and Greenhill & Co. Sullivan & Cromwell LLP was legal adviser. Credit Suisse Group AG advised Blackstone, and Simpson Thacher & Bartlett LLP was its legal counsel.

To contact the reporter on this story: Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net.