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************************************************************************ Read SCIENTECH's SourceBook Weekly article: "Making the Wires Sing: Some Utilities Take on Challenges, Opportunities of Being Wirecoms," at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html ************************************************************************ =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, October 31, 2000 Enron Offers to Buy Out Azurix By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Enron Corp. announced that it has offered up to $275 million in funding to take Azurix Corp. (NYSE: AZX) private at a buy-out price of $7 per share= . Enron owns directly and indirectly about 66 percent of Azurix, a global water company that owns, operates and manages water and wastewater assets and provides related services. The specific structure and timing of Enron's proposal has yet to be determined, but the company's board is now consideri= ng the proposal. ANALYSIS: Azurix has been plagued with operational and financial problems over the last 12 months, culminating in the departure of its former CEO Rebecca Mark in late August. Enron had established Azurix in July 1998 with a $2.4 billion acquisition of Britain's Wessex Water, which provides water and wastewater services to a U.K. population of approximately 3.5 million. Operating primarily in the United Kingdom and Latin America=20 (Argentina and Brazil), Azurix was intended to be Enron's vehicle to capitalize on what it perceived to be favorable market conditions for water investments. Yet, Azurix has not been a profitable operation for Enron, and has been seen as a real anomaly when compared against Enron's consistent success in its other ventures (for example, EnronOnline). For instance, Azurix reported year-end 1999 net income of $67 million, significantly under=20 projections for what Enron had hoped for the subsidiary. After months of speculation, Mark stepped down both as Azurix CEO and from the Enron board of directors, and was replaced by John Garrison, Jr. Mark maintained throughout her tenur= e as CEO of Azurix that the company needed time to develop core assets and capabilities. However, this approach was in stark contrast to Enron's guidi= ng philosophy=01*as espoused by COO Jeffrey Skilling=01*which has moved the co= mpany away from owning hard assets. Skilling also believed that, although acquiri= ng the Wessex operation gave Azurix the engineering capability and industry knowledge to participate in the water business, privatization of the water industry has slowed down considerably since the company began to penetrate this market. Instead of pursuing a capital-intensive strategy for Azurix, Skilling wanted Azurix to become more of a service-oriented business. This change in business direction coincided with the departure of Mark. Yet, Azurix has continued to flounder even since Mark left. In the third quarter of this year, Enron reportedly lost $128 million in its "corporate and other" category and attributed a fourth of the loss to the Azurix=20 operation. Azurix's stock price started a marked decline in early August when it was announced that annual results would not meet analysts' expectations. While Azurix was taken public in June 1999 at a price of $19 per share, it curren= tly is priced at $6 1/4 (at close of the markets on Oct. 30). This is an=20 approximately $3 increase from what Azurix had been trading at recently, presumably due to Enron's announcement of the proposed buyout. Enron's buyout offer comes after four unnamed parties approached Enron about buying its stake in Azurix. Reportedly, three out of the four potenti= al buyers were unwilling to pay more than $4 per share, although one of the buyers initially considered an offer of $7 per share, but ultimately decide= d against the purchase. Enron's motivation in returning Azurix to a private status is probably one of protecting its shareholders. Enron pointed out in its announcement that shareholders would receive, on a timely basis, a cash payment for their shares that is significantly above the price of the shares at which Azurix has traded over the last several months. Making matters worse for Enron, a group of plaintiffs, represented by New York law firm Wechsler Harwood Halebian & Feffer LLP, have initiated a class-action lawsuit against Azurix in the United States District Court for the Southern District of Texas. The plaintiffs seek to recover damages on behalf of all investors who purchased Azurix stock during the period of June 9, 1999 (the date of Azurix's IPO) and Aug. 8, 2000, and who "suffe= red damages as a result." The law firm is claiming that Azurix violated the Federal securities laws. I placed a call to the law firm this morning in hopes of getting additional information about what the class-action suit entails. Unfortunately, I did not receive a call back before press time. The consensus among the vast majority of U.S. energy companies is that the profitability of water as a convergence strategy is questionable. The most obvious negative about the water business is that it most likely will remain a heavily regulated delivery business, offering few opportunities for private companies to penetrate the market. Water is a very staid busine= ss that seems inconsistent with Enron's aggressive growth strategy. After Enron secures a fair return for Azurix's shareholders, it is not clear what the company will do with its water subsidiary, but I would not be surprised if Azurix is sold to another company. However, in August=01*right before Mark's departure=01*Azurix announced that it had begun a pilot progr= am in the Lower Rio Grande using its Internet exchange Water2Water.com. The site will provide users with information, price transparency and efficiency in water exchanges. This announcement indicated that Azurix would begin trading water rights, adding this commodity to the growing list of Enron's traded commodities (energy, telecom, weather derivatives, etc.). So it may be the case that Enron keeps Azurix, but turns it into a water trading operation as opposed to water and wastewater services. In any case, the present objective for Enron will be financing the buyout and ensuring that Azurix's shareholders receive a significant premium to the market price of Azurix. Enron also wants to ensure other benefits to Azurix, including a significant near-term reduction in Azurix's general and administrative expenses, greater certainty to Azurix's customers and employees and increas= ed flexibility for restructuring Azurix's assets and business. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Need to design and implement your IT infrastructure? Learn more about=20 SCIENTECH's Information Technology team and what they can do for you at: http://www.consultrci.com/web/rciweb.nsf/web/Depts-IT.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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