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Enron Mail |
<http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient=
ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/specialpages/Multi_Client.asp< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 <http://secure.scientech.com/images/spacer.gif<; <http://www.thestructu= regroup.com< <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/specialpages/Strategic_Planning.asp< <http://secure.scientech.com/ima= ges/spacer.gif< <http://secure.scientech.com/rci/details.asp?ProductID=3D90= 9< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 12, 2001 Dynegy and Enron Announce Merger=20 By Will McNamara Director, Electric Industry Analysis [News item from Reuters] Dynegy Inc. (NYSE: DYN) agreed on Nov. 9 to acquir= e rival Enron Corp. (NYSE: ENE) for some $9 billion in stock, underlining t= he dramatic reversal of fortunes for the Houston-based energy trading giant= that was valued last year at nearly $80 billion. Enron's stock fell sharpl= y in the past month due to investors' concerns about murky transactions tha= t sparked an investigation by U.S. regulators and damaging downgrades by cr= edit rating agencies. The merged company will retain the Dynegy name. It wi= ll have annual revenues of more than $200 billion and assets worth $90 bill= ion, including more than 22,000 megawatts of electricity generating capacit= y and 25,000 miles of natural-gas pipelines. It will be North America's big= gest marketer and trader of natural gas and electricity, positions previous= ly held by Enron. Analysis: Well, it's now official. The announcement of what presumably will= be the final chapter in the Enron saga came with much fanfare at the end o= f last week. It is indeed a dramatic end. Enron, the maverick and innovativ= e company that has often been credited for literally creating deregulated m= arkets in the energy industry, will no longer exist after what has been a v= ery quick and unbelievable fall from grace over the last several months. Dy= negy, the slow and methodical company that took a more traditional approach= toward success, is making a stunning acquisition of its formal rival and l= ocking in much of the industry market share of Enron. Can there be any doub= t that this is the energy industry's manifestation of the tortoise and the = hare parable? Enron has clearly lost the race to Dynegy, but is making a sm= art choice to be bought, considering its desperate circumstances and the un= likelihood of its regaining financial strength on its own. For Dynegy, this= acquisition is a major win, as the combination will create the biggest and= strongest energy merchant in the world.=20 There are so many interesting dimensions to this mammoth deal. Before addre= ssing some issues related to the approval of the deal, let's establish some= of the key points of the merger agreement. There have been some mixed repo= rts, but it is generally believed that Dynegy is buying Enron for about $10= a share, quite a steal considering that just over a year ago Enron was tra= ding at close to $90 a share and had a market value of nearly $70 billion. = Under terms of the agreement, Enron shareholders will receive 0.2685 Dynegy= shares per share of Enron common stock. Dynegy's current stockholders (inc= luding ChevronTexaco Corp., which currently owns 27 percent of Dynegy) will= own approximately 64 percent of the combined company, while Enron's stockh= olders will own approximately 36 percent of the combined company's stock at= closing.=20 In addition, Dynegy will provide an immediate $1.5-billion asset-backed equ= ity infusion into Enron to help the company with its current financial woes= , followed by an additional infusion of $2.5 billion into the combined comp= any by ChevronTexaco. Chuck Watson, chairman and CEO of Dynegy, will retain= his position at the new company. Steve Bergstrom, president of Dynegy, and= Rob Doty, chief financial officer, will retain their positions at the new = company. It is not presently known what role, if any, Ken Lay, current CEO = of Enron, will hold at the new company.=20 Of course, this acquisition could not have taken place if Enron had not fal= len into a very vulnerable spot this year. Quite literally, Enron was pushe= d into this deal because it was running out of cash, its stock had tanked a= nd its credit ratings were slashed to near junk levels, all within the last= several weeks. Enron's decline over the course of 2001 has been the result= of losses in its telecom sector, losses from its involvement in India, the= departure of its former CEO Jeffrey Skilling, a Securities and Exchange Co= mmission (SEC) investigation into some of its business practices, and lack = of investor confidence about Enron's honesty in its financial reporting. Th= is last point gained validity last week when Enron announced that it had ov= erstated earnings by 20 percent over the last four years and investors shou= ld disregard the company's financial statements from 1997 through the first= half of 2001. The restating of its earnings for the last five years sliced= $591 million from Enron's reported profits. In addition, Enron revised its= debt upward in each year from 1997 to 2000. At the end of 2000, Enron's de= bt was $10.86 billion, $628 million more than it had previously reported. B= y not reporting this debt earlier, Enron presumably was able to maintain a = stronger credit rating than it would have had the accurate records been dis= closed.=20 The key value for Dynegy in this acquisition is Enron's successful energy t= rading business. In addition, Dynegy could also find synergies in Enron's r= etail unit, Enron Energy Services and EnronOnline, the company's electronic= trading unit. Dynegy has a similar trading site known as Dynegydirect, whi= ch was launched after Enron gained the first-strike advantage in this marke= t space. Details are still emerging, but it would make sense if Dynegy opte= d to not purchase other units under Enron's business structure, such as the= company's water and telecom businesses, which are losing money. Dynegy has= its own telecom unit, which has also lost money this year, so it may not w= ant to expand in this slow-growing sector at this time. Vivendi Environneme= nt, a French company that has expanded into various lines of business, has = reportedly expressed interest in the remaining subsidiaries of Azurix, Enro= n's struggling water subsidiary. Note that Enron sold Azurix North America = to American Water Works.=20 The deal is subject to regulatory reviews and shareholder approval from Dyn= egy and Enron shareholders. Dynegy shareholder approval may be contingent u= pon any possible downgrades on its long-term debt that Dynegy could encount= er with the purchase of Enron. At this juncture, it does not appear that Dy= negy will be downgraded, but this is a fast-changing story and conditions c= ould change abruptly. Financing the deal may also be an issue, even with th= e infusion of capital from ChevronTexaco. Dynegy reportedly has $3 billion = worth of debt and has a market capitalization of $11.7 billion. Thus, Enron= 's own more substantial debt may be too significant for Dynegy to absorb, a= concern that may cause Dynegy shareholders to veto the deal. This issue co= uld be helped if Dynegy only elects to purchase some of Enron's assets and = if there is some repair work done on Enron's balance sheets.=20 The issue of regulatory approval could be difficult, as the combination of = the two huge companies may cause regulators to be concerned about market po= wer and antitrust issues. The review of this merger will be unprecedented, = considering that the wholesale natural-gas and electricity trading market i= s still fairly young. Certainly, a deal of this magnitude has not previousl= y occurred in the deregulating energy industry. It is not presently clear w= hich regulatory agency will be involved in the review, although the Federal= Energy Regulatory Commission (FERC), the Federal Trade Commission and the = Justice Department could all be involved. FERC would most likely become inv= olved only if the acquisition includes the transfer of a physical asset, su= ch as a pipeline. FERC may not become involved if the deal is structured so= lely as an exchange of stock. Not involving FERC would be more advantageous= for Dynegy and Enron as the timeline for approval would be significantly s= horter.=20 An issue that most likely will be at the top of the list of review items fo= r regulators would be the extent to which the combination of Enron and Dyne= gy would hold market power in the natural-gas trading space, which could pr= e-empt market entry by other competitors. The combined company would be con= siderably larger than its nearest competitors. Scope and scale are consider= ed the top competitive assets in the trading sector, and the combination of= Dynegy and Enron will certainly have those assets in abundance. It will fa= ll on regulators to determine if the combined company is so large that it p= recludes other competitors from emerging into the same space.=20 To say that this deal is a sweet victory for Chuck Watson is an understatem= ent. The two rival companies followed very different paths to success. Enro= n, under the leadership of Jeffrey Skilling in particular, espoused an unor= thodox belief that the company did not need to own physical assets in order= to achieve success in the energy-trading space. Dynegy, on the other hand,= approached the market from the opposite perspective, and diligently acquir= ed diverse generation assets across the United States and internationally t= o support its trading operation. Up until the start of 2001, it appeared th= at Enron's strategy was the more successful of the two. Enron, with $100 bi= llion in revenues and $1 billion in profits in 2000, ranked fifth on Fortun= e 500's list of largest U.S. companies. In contrast, Dynegy ranked 54 on th= e same list and had $29 billion in revenues and $500 million in earnings. H= owever, 2000 turned out to be Dynegy's year and the success continued into = 2001, the very year that would bring Enron's downfall. Enron's problems cul= minated in $638 million in losses in the third quarter, after taking $1.01 = billion in charges associated with several of its non-core businesses. Take= n with the other factors plaguing the company, Enron became exceptionally v= ulnerable and prone to a takeover, which has now provided Dynegy with a str= ong gain.=20 The purchase of Enron will literally quadruple Dynegy's size and should imm= ediately provide an accretive earnings contribution. Further, Dynegy claims= that it expects a 15- to 20-percent annual earnings growth over the next t= hree years following its planned acquisition of Enron. If it gains all of t= he necessary regulatory approvals, Dynegy will become the undisputed market= leader in the energy industry, with annual revenues of $200 billion and $9= 0 billion in assets. The company will have 22,000 MW of generating capacity= , which moves its closer to the previously established goal of accumulating= 70,000 MW by 2005. In other words, the combined company will dwarf any oth= er competition in the trading sector and be considerably ahead of its neare= st competitors such as Mirant or Duke Energy in terms of size, resources an= d assets.=20 Word of the acquisition caused Enron's shares to increase some, one of the = few upward bumps that the company had experienced in the last few months. S= hares of Enron rose 44 cents, or 5.2 percent, to $8.85 in mid-day trade on = the New York Stock Exchange on Nov. 9. As of early morning trade on Nov. 12= , Enron shares were priced at $9.40. Shares of Dynegy gained $2.24, or 5.8 = percent, to $41 in early trade on the New York Stock Exchange.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com<, with "Dele= te IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D11/12/2001<;
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