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Enron Mail |
Ken, I thought it would be better if I typed my thoughts for you since my
hand writing can be somewhat difficult to read. Before you decide the methodology for moving our project beyond the D. Ambani phone call, I would like to share a few thoughts that I believe reduces the risk of Enron being an E&P buyer. I know the implications of making a large E&P purchase are far greater than just the cash requirement, but I believe with the following changes to the plan presented yesterday and a little 3rd party information, you may feel more comfortable making this decision. Under the buy/sell arrangement a small risk of buying will always be present, but I believe the risk reward ratio in this case has very strong merit. My goals for Enron are three fold; a) sale the assets, b) get cash in the door before year-end, and c) get fair value for the assets given the current situation. My comments touch upon five topics: 1) Reverse the buy/sell process giving Enron the control vote 2) Pay the Penalty 3) Contact someone at the Janus Fund to talk about Reliance's Financial condition 4) Thoughts on non-Reliance bidder's 5) Information and the future process Reverse the Buy/Sell Process: The plan outlined yesterday using the buy/sell scenario is the best scenario for achieving all of our goals. The risk for Enron which is most troubling is the possibility of being a buyer versus a desire to be a seller. I firmly believe if we make one change to the plan as described below, we can increase our probability of a successful sale to near 100%. If we don't use a but/sell arrangement I am concerned that we will not get fair value or cash in the door this year. In fact, I suspect we will elect not to sell because of contract or valuation problems, which in effect leave us with a stranded asset and a lot of employee problems. When you talk with Dhirubhai we can propose the buy/sell concept with RIL making the first bid to purchase. Enron then has the right to sell at that price or increase the bid by 5% and RiL must sell. Since we are now in the control position the 10% tax logic we talked about yesterday no longer is valid, so I would describe the 5% as a control premium. The only reason we want the buy option is in the event they offer a very low number. I would suspect them to bid in the $550 to $650 million range. They just turned down my offer to purchase their assets at $450mm and indicated we were substantially below their value when I tried to engage them in a dialogue. They know Enron paid $620 million just 12 months ago for the same position. We know they internally have reserves booked higher than ours and have a strong desire to have a substantial upstream position that they can control. It is possible that RIL would bid less than $500 million but I put that probability at less than one percent. This reduces Enron's risk dramatically and increases our probability of getting all of our objectives met. We also get an added benefit, from pitching the deal with RIL as the first bidder, because this will strengthen the perception that we (Enron) want to be the buyer, which is a key perception to have a fair auction with only one legitimate buyer, Reliance. If we pitch the deal as suggested above, we need to recognise going in that they probably want the control position as well. I believe they would pay a very large value for these assets due to their tax position and by bidding first they take great risk of leaving a lot of money on the table or not getting the deal at all. I would suspect that they will at a minimum suggest we flip a coin to see who bids first. Initially I would just say no, but we may need to deal with this issue and probably should decide early on if it is a deal killer. If we did flip a coin, we would wait until the documents were final and the escrow agreement was signed so there would be no backing out without a penalty. In this scenario it would actually help get a more impartial document done quicker if neither party knew the bidding sequence until after the drafting was finalized. Pay the Penalty: While it is not the way we want to do business, the worst case scenario under the proposed escrow agreement is to forfeit $25 million if we elected not to follow through in an Enron buy scenario. Considering the upside to the buy/sell under either sequence (Enron first or RIL first) it may be worth the risk of losing the escrow under a black Friday scenario. I want to think about this over the weekend, but while I was thinking this afternoon the risk reward seems to be very favorable. Contact someone at Janus Fund: This was suggested yesterday and I would strongly urge you to do this if you feel comfortable making the inquiry. Janus bought approximately a 5% position in RIL about 1-2 months ago. I think you will get a very positive report on both the cash front and their desire to make the upstream a key part of the company. Thoughts on Non- Reliance Bidders: I have spent a lot more time thinking about this issue. I can talk you through the reasons, but as long as Reliance is involved and a western company can only purchase a 30% non-operated working interest, we will have to take a huge discount to fair value. I will be very surprised if we could get $450 million. Again, going to the Shell's, BG's,,,etc early on in the process, I believe, is a huge mistake, both internally and externally. Information Flow and Process: Ken this is a very sensitive area but I feel compelled to mention this to you. I am concerned about too many people knowing our plan and strategy and possibly others wanting to branch out with the intentions of helping, but actually causing problems. This needs to be managed by one person, not three or four. To meet all of our objectives this has to be an orchestrated deal from a to z. I think you know more about my background then most others in Enron. I worked the E&P M&A business for 10 years and did pretty well at it. I know the oil business and I believe that is a key to getting a good deal done. I know these assets and all of the complex issues surrounding the assets, our subsidiaries, tax issues and the book considerations. I'm the best person to get this deal done once you decide the risk the company is willing to take. I know the limits of my authority and I will work within those bounds and keep the OOC completely and totally informed so proper decisions can be made when necessary. Ken, I promise you I will use others in the company where and when appropriate. If I need help in India, I would not hesitate to ask Sanjay for such. However, the last thing we can afford is excess discussion in India on this deal. If Dhirubhai agrees to the deal, we need to get a meeting set in Europe at a neutral site to start the process. My main objective is to have a successful deal. I have decided not to go to India so we can concentrate on moving this forward. Also, I will need your guidance on the future of the E&P plans for Enron when we decide the direction we plan to take on Panna, Mukta and Tapti. I have looked at the key people necessary to make this happen and can talk to you about that as well if you so desire. Thanks jeff
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