Dynegy sees no more nasty surprises from Enron
By Andrew Kelly
HOUSTON, Nov 12 (Reuters) - Dynegy Inc. (NYSE:DYN - news) said on Monday does not foresee any damaging disclosures from Enron Corp. (NYSE:ENE - news), slammed by news of murky off-balance sheet transactions, that could derail its planned takeover of the beleaguered energy trading giant.
However, Dynegy said it can drop its $9 billion offer if more bad news emerges, or if pending lawsuits against Enron lead to more than $3.5 billion in costs.
Dynegy also expressed confidence the takeover announced on Friday, will win U.S. regulatory approval.
``I really have a good deal of confidence, but not an absolute guarantee, that we are going to be fine here,'' said Dynegy Chief Executive Officer Chuck Watson, when pressed about the possibility of further troubling disclosures by Enron.
Watson said Dynegy had run the deal through worst-case scenarios and concluded that it made good business sense.
Investors apparently agreed, bidding up Dynegy shares $5.55, or 14.3 percent, to close at $44.31 on the New York Stock Exchange. Enron shares gained 61 cents, to 7.1 percent, to $9.24. The deal valued Enron stock at $10.41.
Enron agreed to a Dynegy buyout after it was overwhelmed by a series of problems, including a U.S. regulatory probe into the off-balance sheet dealings, a $1.2 billion cut in shareholder equity and damaging credit rating downgrades.
Watson has cause for concern about new disclosures from Enron, which last Thursday said an internal probe showed its earnings had been overstated by some $600 million since 1997.
In a conference call with analysts on Monday, Dynegy executives emphasized their confidence in the future of the combined company, including annual projected earnings-per-share growth of 15 percent to 20 percent over the next three years.
But they also fielded a barrage of questions about how well Dynegy has insulated itself against further surprises of the kind that had slashed Enron's market value last week to barely one-tenth the almost $80 billion it was valued in August 2000.
DYNEGY DOUBTS HUGE LIABILITIES
To ensure against unpleasant disclosures, Dynegy wrote so-called material adverse change clauses into the deal, allowing it to walk away from Enron if there is serious deterioration of its businesses or assets.
In particular, Dynegy can turn its back on the deal if pending litigation against Enron -- including a stack of lawsuits filed by angry investors who have lost a fortune -- leads to costs of more than $3.5 billion.
Chief Financial Officer Rob Doty said it was highly unlikely that this threshold would be reached, even if a ``very substantial'' settlement was reached in the stockholder suits.
Commerzbank Securities analyst Andre Meade said he was not yet convinced that the stream of bad news from Enron was over.
``I think Dynegy is making a big bet that they can successfully clean up the problems that Enron has had,'' he said.
But UBS Warburg analyst Jay Yannello said after hearing management discuss the deal, he was reassured it could address tough questions -- a breath of fresh air after Enron's tight-lipped response to investors.
Some analysts have said the deal could be thwarted by regulators because of concerns that Dynegy would be too powerful after merging with Enron, currently North America's biggest buyer and seller of both natural gas and electricity.
Watson said Dynegy would have to work hard to explain the deal to regulators, led by the Federal Energy Regulatory Commission, but does not doubt it will eventually pass muster.
``We really are confident that up and down the line we are going to be able to convince them that this is really in the best interest of the energy industry as well as these two respective companies,'' he said.
GAS PIPELINE OPTION, BREAK-UP FEES
Dynegy executives also said there would be no complicated financing arrangements of the kind that triggered Enron's downfall, and that the new Dynegy will be able to keep top Enron executives and traders from defecting to rival firms.
Enron officials declined to comment on reports that its banks J.P. Morgan and Citigroup were considering pumping an extra $500 million of capital in to Enron.
Oil company ChevronTexaco Inc. (NYSE:CVX - news), a major Dynegy stockholder, has already agreed to inject $1.5 billion into Enron immediately to keep it afloat while the merger is completed, which Dynegy expects to take six to nine months.
If Enron backs out of the deal to accept a higher offer, it would have to pay a $350 million breakup fee to Dyegy.
And if the deal breaks down for any reason, Dynegy would be allowed to exercise an option to acquire Enron's Northern Natural Gas pipeline subsidiary.
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