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Dynegy Deal To Buy Enron Hits Crossroads ----
Even as it reiterated its intention to purchase Enron Corp., Dynegy Inc. is coming under increasing pressure to renegotiate or walk away from the multibillion-dollar deal.
The pressure is stemming from the continuing slide in the price of Enron shares and the mounting financial problems at the Houston energy-trading company, the nation's biggest marketer of electricity and natural gas. During the past month, Enron has taken a $1 billion write-off of assets, revised downward the earnings of the past several years and taken a $1.2 billion reduction in shareholder equity.
The problems have been due largely to dealings Enron had with private partnerships, run by some of its own executives, under investigation by the Securities and Exchange Commission. In an SEC filing Monday, Enron disclosed hundreds of millions of potential additional write-offs as well as the possibility that its weakening financial condition could force it to repay more than $2 billion in loans by the end of the year.
As of 4 p.m. Wednesday in New York Stock Exchange composite trading, Enron shares fell $1.98, or 28%, to $5.01 each after having dropped 23% Tuesday. In excess of 115 million shares traded Wednesday, more than four times the volume of any other Big Board stock. Enron's bonds also again traded sharply lower, market observers said.
The turmoil spilled over to Dynegy's stock, which also was among the most actively traded on the New York Stock Exchange. As of 4 p.m. Wednesday, Dynegy shares fell $1.94 to $39.76 each.
On Wednesday, Dynegy issued a statement in which Chairman and Chief Executive Chuck Watson said his company was working "to accelerate the regulatory approvals required to complete the merger in accordance with the previously announced agreement" though it continued to perform "due diligence" on Enron.
Under the merger agreement, Dynegy has opportunities to renegotiate or walk away from the deal if Enron's financial and legal problems become severe enough. However, some observers said it can be difficult to invoke these so-called material adverse change clauses. They point to a decision earlier this year by a Delaware Chancery Court judge who forced Tyson Foods Inc. to complete a planned purchase of IBP Inc. even though Tyson, a Springdale, Ark., food-products company, had wanted to cancel the transaction because of a drop in IBP's earnings and accounting problems at an IBP unit.
Dynegy officials didn't return calls seeking comment. To complete the deal, two-thirds of Dynegy shareholders and a majority of Enron shareholders would have to give their approval. No dates for those votes have been set.
One person familiar with the merger plans said the SEC filing Monday by Enron contained information Dynegy hadn't known about. Dynegy representatives planned to work through the weekend evaluating the importance of this new information as part of the company's due diligence, this person said. It couldn't be determined what the new information was.
The merger agreement, announced Nov. 9, calls for Dynegy to exchange 0.2685 share for each of Enron's roughly 850 million fully diluted shares, giving the purchase a value of about $9 billion at Dynegy's current stock price. However, from a price standpoint, the deal is appearing less attractive to Dynegy.
On the day of the merger announcement, Enron shares were trading at about $ 8.63 each, or about 83% of the purchase price under the exchange ratio. As of Wednesday, Enron's market price was only about 47% of the merger-formula price. Such a sharp deterioration is unusual following a merger announcement, when the stock price of the company being acquired generally begins trading relatively close to the offering price.
Sentiment among Wall Street analysts also is turning against the merger. Initially, many analysts lauded the merger as a move that would rescue Enron and provide a major boost to Houston-based Dynegy. Dynegy and Enron officials have predicted that the merger, supposed to be completed late next year, would significantly and immediately increase Dynegy's earnings.
Now analysts are challenging that assumption. Ron Barone, managing director at UBS Warburg LLC, said he believes that because of Enron's financial problems, a combined company would actually have lower earnings next year than Dynegy would have by itself. Mr. Barone said he thinks a "likely scenario" is that the merger formula will be renegotiated sharply down to about 0.15 Dynegy share for each Enron share.
Such a ratcheting down wouldn't be without precedent in the deal. According to one person familiar with the merger negotiations, Dynegy reduced the exchange formula at least once prior to the Nov. 9 announcement because of Enron's rapidly sinking stock price, which at the beginning of this year was above $80 a share.
In perhaps the most significant sign of the turning tide on Wall Street, Goldman Sachs analyst David Fleischer lowered his ratings on Enron and Dynegy. A longtime Enron fan, Mr. Fleischer issued a report expressing doubts that the merger would help Dynegy's earnings and whether Enron could "recover the significant business that has been lost" in its giant energy-trading operations. "The Enron machine continues to sputter," Mr. Fleischer wrote.
Some observers say that if Dynegy walked away from the deal or tried to renegotiate the terms significantly, Enron might be pushed into a bankruptcy-law filing. Without the Dynegy acquisition and continued support from its bankers and customers, an Enron bankruptcy-court filing "is highly possible," said Ralph Pellecchia, a senior director at Fitch, a credit-ratings agency. On Wednesday, Fitch maintained its credit rating on Enron at just one notch above noninvestment-grade, or "junk," status. But Fitch also said it believed Enron's trading partners had made "significant cash collateral calls" in recent days that are "well in excess of previous expectations," contributing to "liquidity pressures."
Among the advisers Enron has hired during its current crisis is the law firm of Weil, Gotshal & Manges, which specializes in bankruptcy and corporate-workout situations. Asked about a possible bankruptcy filing, an Enron spokeswoman said the company expects the Dynegy deal to go through and therefore doesn't expect to have to look at alternatives to the merger. Since the merger announcement, Enron Chairman Kenneth Lay has said his company had alternatives to the Dynegy deal but he has declined to identify them. Enron said it made some progress improving its financial position. The company said it reached a final agreement with units of J.P. Morgan Chase & Co. and Citigroup Inc. on the remaining $450 million of a previously announced $1 billion in secured credit lines. Enron said lenders had agreed to extend repayment of an existing $690 million note to mid- December from next week. The spokeswoman said a restructuring of that obligation is expected to be completed next month so that repayment wouldn't be required this year.
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