11/27 00:23
Dynegy May Modify Enron Purchase Terms, People Say (Update2)
By Eileen O'Grady
Houston, Nov. 26 (Bloomberg) -- Dynegy Inc. may renegotiate terms of its proposed $22.9 billion purchase of Enron Corp., whose shares have fallen 54 percent since the merger was announced, people familiar with talks between the companies said.
Executives of the two energy-trading companies discussed possible changes in the terms over the weekend, the people said. The offer made on Nov. 9 values Enron at $10.54 a share in Dynegy stock. Enron's stock closed at $4.01, indicating investors don't believe the sale will be completed under the original terms.
Enron is seeking as much as $2 billion in equity investment and Moody's Investors Service is weighing whether to downgrade the credit rating of the energy trader, which said last week its debt was higher than earlier reported. Enron needs to offer more attractive terms or risk losing the support of Dynegy investors for a deal needed to save the company, analysts said.
``The choices are fairly stark: Renegotiate the deal or file for Chapter 11,'' said John Olson, an analyst with Sanders Morris Harris.
Neither Enron spokeswoman Karen Denne nor Dynegy spokesman John Sousa would comment on whether talks on a new buyout agreement are underway.
Current terms call for an exchange ratio of 0.2685 share of Dynegy stock for each Enron share. Given recent disclosures about Enron's debt and the drop in the stock price, a fairer ratio would be 0.15 share of Dynegy, said Ronald Barone, a UBS Warburg analyst who rates Dynegy a ``strong buy.''
Half Price?
Enron and Dynegy are talking about cutting the ratio to less than 0.15, which would value the stock portion of the transaction at about $5 billion, or less than $6 per Enron share, the Wall Street Journal reported, citing people close to the discussions.
In addition, the companies may announce as early as today an extension by some banks on the repayment of Enron's debt, a $500 million cash infusion from Citigroup Inc. and J.P. Morgan Chase & Co., and an agreement that would keep the purchase intact despite lawsuits over Enron's employee-retirement plan, the New York Times said.
``If they can renegotiate the deal to half (the original price), that's where you get really attractive earnings,'' said Gordon Howald, an analyst at Credit Lyonnais who rates Dynegy a ``buy.''
Under current terms, the deal makes sense for Dynegy only if Enron earns 85 cents or more, Howald said. Barone has reduced his estimate of Enron's 2002 earnings from $1.65 a share to 75 cents.
Dynegy shares fell $1.15, or 2.9 percent, to $39.25.
Additional Financing
New terms may not be necessary if Enron can get the additional $2 billion in financing it's seeking, some investors said.
``If people who've looked at Enron are willing to put in that kind of money, it sends a message that their core businesses -- trading, pipelines and energy management -- are still sound,'' said Kathleen Vuchetich, who helps manage $1.4 billion in assets in the Strong Utilities Fund, 4.3 percent of which is Dynegy stock.
Enron has debt payments of more than $9 billion due before the end of 2002, and has less than $2 billion in cash and credit lines left, the company said in a filing last week. If its cash reserves run too low, Enron's credit rating may be cut below investment grade. That would trigger $3.9 billion in debt repayments for two affiliated partnerships.
Moody's Investors Service hasn't issued a report on Enron since the company filed a 10-Q quarterly report with the Securities and Exchange Commission last week. On Nov. 9, it rated Enron's debt one notch above junk. The rating company's analysts didn't return calls seeking comment today.
Egan-Jones Ratings Co. lowered its rating on Enron's credit today to ``BB-'' from ``BB,'' a level below investment grade.
Write-Off
The Houston-based company also said in the filing that it had a $690 million note due this week, and that it may have to reduce fourth-quarter earnings by $700 million. The write-off would come because it used stock to guarantee debt owed by an affiliated partnership, and the value of that stock has plunged.
On Wednesday, Enron got a three-week reprieve from lenders on the $690 million note and closed on a $450 million credit line. Dynegy Chief Executive Officer Chuck Watson said he was ``encouraged'' by the developments.
Enron is negotiating to restructure its other debt, Denne said today. J.P. Morgan and Citigroup executives met today to line up investors willing to buy $2 billion in bonds convertible into Enron stock.
Many of Enron's trading partners are shunning the company, and some analysts now say Enron's 2002 earnings may hurt, rather than boost, Dynegy's earnings, as Watson has projected.
Deteriorating Daily
``The value of the assets Dynegy is trying to buy -- the trading and marketing businesses -- are deteriorating on a daily basis as more counterparties back off on trading and dealing with Enron,'' said Mike Heim, a securities analyst at A.G. Edwards & Sons Inc.
Watson said on Nov. 9 that the merger would increase Houston- based Dynegy's 2002 earnings by 35 percent to $3.40 to $3.50 a share.
To realize those gains, Watson will have to help Enron stay out of bankruptcy by helping it get financing, Vuchetich said.
``Dynegy needs to make sure there's no hint the trading operation is worth less than they thought,'' Vuchetich said. ``It has to be kept running to maintain its value.'' |
