Enron, Dynegy Work to Save Deal Amid Threat of Credit Downgrade
November 28, 2001
By REBECCA SMITH and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
Top executives of Enron Corp. and Dynegy Inc. raced to salvage a deal to combine the two energy-trading companies amid growing signs that Enron is facing cash-flow problems as a result of a sharp downturn in its core trading business.
The executives' task gained urgency amid worries that Enron's debt may soon be downgraded to junk status by leading credit-rating agencies. After holding talks with executives of Enron and Dynegy, representatives of Moody's Investors Service Inc., Standard & Poor's Ratings Group and Fitch Inc. agreed to hold off on making any ratings move Tuesday, people familiar with the discussions said. J.P. Morgan Chase & Co. and Citigroup Inc.'s Citibank, which are shepherding the merger and have already loaned $1 billion and agreed to invest an additional $500 million in the merged company, may arrange still more funding for Enron, these people said.
"I hope they err on the conservative side and stockpile cash," said Ralph Pellecchia, analyst for Fitch, the credit-rating agency.
With few viable options remaining, Enron's board late Tuesday informally agreed to a new share-exchange ratio of 0.12 shares of Dynegy for each Enron share tendered, down more than 50% from the original offer of 0.2685 Dynegy share for each Enron share, according to one person familiar with the situation. But the talks were still fluid as of late Tuesday.
The latest proposed share-exchange ratio values Enron at $4.91 a share, or a total of $4.17 billion. This would compare with the original value of $10.98 a share, or $9.33 billion. In exchange for reducing the purchase price, some members of the Enron team were insisting on more control over the merged company. Dynegy also was considering an additional $250 million cash investment in Enron. Dynegy, together with ChevronTexaco Inc., has already injected $1.5 billion into Enron in an effort to stabilize the company.
Talks between Enron and Dynegy were said to be tense and occasionally acrimonious.
At 4 p.m., Enron shares were up 10 cents to $4.11, while Dynegy shares were up $1.64 to $40.89, in New York Stock Exchange composite trading.
Talks between Enron and Dynegy began in earnest over the weekend to cut the price of the all-stock transaction after Enron's share price had plummeted in the wake of disclosures that its future earnings wouldn't be as high as originally anticipated. On Nov. 9, Dynegy originally agreed to buy Enron after the emergence of damaging revelations concerning a series of deals that allowed Enron executives to profit personally at the expense of the company and its shareholders. Those deals are now the subject of a Securities and Exchange Commission investigation.
While struggling to keep the planned merger alive, Enron also has been seeking to extend the maturity dates of some of its borrowings. Enron has a total of about $13 billion of debt, of which about $9 billion comes due by the end of next year. The company may find itself on the hook for an additional $7 billion in off-balance-sheet debt and another $3.9 billion in potential liabilities, related to troubled investment partnerships, if its credit rating drops to below investment grade, says Mr. Pellecchia, the Fitch analyst. A cut to a junk-status credit rating could deal a fatal blow to Enron, which needs huge sums of cheap money to keep its trading operations alive.
Enron, nowadays, seems to be generating less cash from that business, which accounted for more than 90% of its profit in the most recent quarter. In the five weeks since Enron's problems became widely known, its trading partners have sought to protect themselves by shifting deals elsewhere from the dominant EnronOnline trading exchange and to limit their exposure to the Houston-based company. About a week ago, Enron said it had about $1.6 billion in cash, which surprised analysts who expected a number at least $1 billion higher given the most recent infusions from Dynegy and the banks.
Enron spokeswoman Karen Denne said the company "is continuing to meet all our obligations." She added that trading activity at the EnronOnline unit had been "below average" in recent days, but that the company believes "it has stabilized."
Analysts say cash on hand doesn't appear to be enough to keep Enron alive for long, given the reluctance of its trading partners and creditors. Rebecca Followill, an analyst at Howard Weil in Houston, says that Enron needs a bigger cash hoard than ever to rebuild confidence. She reckons Enron needs $4 billion to $5 billion on hand while the merger deal winds its way through shareholder and regulatory approvals.
-- Robin Sidel and Jathon Sapsford contributed to this article.
Write to Rebecca Smith at rebecca.smith@wsj.com3 and Gregory Zuckerman at gregory.zuckerman@wsj.com4
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