BusinessWeek/Dynegy: Does Goodbye Mean Good Buy?
NOVEMBER 29, 2001
NEWS ANALYSIS
The collapse of the Enron deal may be a good thing for the Houston energy company -- and for investors willing to move fast
Shares of the former energy giant Enron (ENE ) fell to under a dollar on Nov. 28, after would-be buyer Dynegy (DYN ) formally terminated its takeover attempt. "We knew when to say no, and this morning we said no," said Dynegy CEO Chuck Watson during a conference call with analysts on the same day.
A debacle? Not for Houston-based Dynegy. While Enron's future is murkier than ever, Dynegy should recover, despite the bruising its stock took during the two-week courtship of its rival. Even after pulling out of the deal, Dynegy lost nearly $5 on Nov. 28, to close at roughly $36. But astute investors may want to look beyond the short-term volatility. "As a shareholder of Dynegy, we're happy they protected themselves as Enron was unraveling," says Catherine Zaharis, a fund manager with Invista Capital Management.
Many analysts believe Dynegy remains a solid energy company whose strategy for growth includes healthy trading operations and a proven track record with acquisitions that add to the bottom line. Dynegy stock, which hit a 52-week high of $59 on Apr. 30., had run up to around $46 after the initial news of the merger on Nov. 9, so its current price could be attractive to some investors.
KNACK FOR ASSETS. Dynegy owns an estimated 6% of the energy-trading market -- which looks small compared to the 20% to 25% that Enron held before the meltdown. Yet its trading operations are top-drawer and it is among the top 10 U.S. energy traders by volume. Indeed, revenues from that business contribute the bulk of Dynegy's overall earnings. For the third quarter, the marketing and trading business recorded a net income of $263 million -- an 85% increase over the $142 million reported for the third quarter in 2000.
By contrast, EnronOnline -- a Web-based e-commerce system operated by Enron that offered a variety of commodity products beyond electric power and natural gas -- was shut down after announcement of the deal's demise. The system was widely used by energy traders and handled billions of dollars in transactions a day. Its future is now uncertain.
In addition to its solid trading operation, Dynegy has shown a knack for selecting physical assets. In early 2000, it completed the acquisition of Illinois utility Illinova. At the time of the deal, the newly combined company was worth $7.5 billion and included generating assets of more than 14,000 megawatts, enough power to light up 14 million homes. The deal boosted Dynegy's operating income for that quarter by $143 million over the previous first quarter.
"Dynegy has a great track record in doing deals that work and improve the company and earnings. I don't see them having to change a lot how they do business," says Matthew Wright, manager of the First Investors Utilities Income Fund, which has a large holding in Dynegy. Enron had a thriving trading house but used revenues from that business to make unwise investments in India and South America, analysts point out. Says Zaharis: "Dynegy is much more asset-focused than Enron."
ENRON'S WOES. That's not to say that the collapse of the deal doesn't carry some risks. Dynegy has $75 million in deals pending with Enron which could be in jeopardy. And despite the collapse, Dynegy said it would still try to exercise its option to buy Enron's Capital Northern natural gas pipeline, using a $1.5 billion investment from Chevron-Texaco (CVX ), which owns 26% of Dynegy. Enron CEO Kenneth Lay said in a statement the company is reviewing its options.
The deterioration of Enron's stock, which was trading at nearly $85 a year ago, accelerated in mid-October after the company reported a third-quarter loss and a reduction in shareholder equity. Also prompting investors to jump ship was a formal investigation by the Securities & Exchange Commission of controversial partnerships that Enron officials allegedly used to move assets on and off the company's books. Enron says it is cooperating with the investigation and maintains it has done nothing wrong. Compounding Enron's woes: In early November, the company announced it would restate its earnings since 1997.
"It's not great, this whole deal collapsing under the Enron crisis," says Wright. "But I sure didn't want Dynegy to go through with it. There was a lot of risk involved." It's quite plausible that Dynegy CEO Watson reached a similar conclusion when Enron's core trading business came under fire during the last several days, putting into question its earnings potential going forward. With the Enron-related risk removed from the equation, however, Dynegy stock could rebound nicely.
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By Heesun Wee in New York
Edited by Patricia O'Connell
Copyright 2000-2001, by The McGraw-Hill Companies Inc. All rights reserved.
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