January 13, 2011
Dynegy's hard past will soon have a new beginning. Carl Icahn has agreed to take the independent power producer private at a price of $665 million in cash plus the assumption of $4 billion in debt - unless the company can attract a better all-cash deal in the coming weeks.
Luring capital is no small task. As such, power companies have to consider all options -- including those beyond the traditional debt and equity markets. Private equity firms are good prospects: They have the cash and they seek productive assets. Utilities, meantime, are short generation and transmission and need solid partners. The two have already met and time has shown they work well together.
As for Icahn, he is already Dynegy's largest shareholder. He owns almost 10 percent of the company's stock and has the option to buy another 5 percent. The activist investor helped block an earlier bid from the Blackstone Group that was for $5 a share, or 50 cents less than what he had offered. Icahn and its fellow investors say that they expect the weak prices for natural gas to recover and to help give Dynegy the boost it needs.
The proposed deal is "a very positive outcome for Dynegy's stockholders," says Bruce Williamson, chief executive of the unregulated power producer.
Dynegy has been on the auction block for two years. It is projecting negative cash flows until 2015 that total $1.6 billion. Its debt levels also remain high at $3.95 billion. And with low natural gas prices it fears it will be unable to meet its obligations. It is estimated that those bond holders choosing to cash in now rather than wait until their notes mature are getting roughly 70 cents on the dollar.
Icahn, though, has said he would support an offer that is superior to his - if it arrives before January 24. At this point, it's unclear what he would do with the company, if it does fall under his control. Some analysts are saying that he will splinter off certain segments of the business, or perhaps just sell of some power plants.
News reports are rampant that NRG Energy could buy some of those generators from Icahn. If the Blackstone offer had gone through, that power producer had agreed to purchase four of the natural gas plants for $1.36 billion.
Dynegy owns about 12,100 megawatts of modern generation that is located along the east coast and west coast, as well as in Illinois. Its heyday occurred in the late 1990s when the shares of unregulated power producers skyrocketed. But those enterprises came crashing down in 2001. The recession and the reduced demand for electricity worked in tandem with a host of energy-related scandals to rock the entire sector.
This is not Icahn's first foray into the power business. In 2003, he signed a joint venture with Dallas-based Panda Energy International that builds unregulated power plants to purchase U.S. energy assets and related infrastructure.
The move has been part of a bigger trend whereby private capital is making its way into the utility sphere. Kohlberg, Kravis Roberts and TPG closed a $45 billion purchase of Dallas-based TXU in 2007 in what has been the largest private transaction to date.
Warren Buffett's Berkshire Hathaway, meanwhile, acquired PacifiCorp from ScottishPower for $9.4 billion in 2005. The same group purchased MidAmerican Energy Holdings in 2000, which set off the development to go private.
A consortium led by Macquarie Infrastructure Partners, furthermore, bought Washington State-based Puget Energy in 2007 for $3.5 billion. Macquarie, which is the largest investment bank in Australia, also purchased Pittsburgh-based Duquesne Light Holdings that same year for $1.6 billion.
"During this time of economic instability, Puget Energy has been able to improve its credit rating and secure long-term credit facilities to improve and expand our energy delivery system, providing local jobs and meeting local needs," says Stephen Reynolds, chief executive of the Washington State-based utility that had a need to attract $5 billion.
Private equity firms can range from hedge funds and venture capital firms that may seek minority interests to those that have majority stakes and that actively participate in the operations of businesses.
Most businesses need access to the capital markets in which they can obtain the funds to do research and development, buy equipment and hire workers. At the same time and in the wake of some corporate accounting crimes, the pressures associated with quarterly reporting and corporate governance rules have become intense.
But critics of taking utilities private argue that those buyers are more interested in turning quick profits than in building sustainable assets. The concerns are particularly acute in the utility sector that is vitally important to the welfare of an economy.
That's a point countered by private equity firms. Unlike publicly-owned companies, they say that they are not obsessed with quarterly filings and therefore take a longer view. Utilities are compelled to build billions in new infrastructure to meet the expected demand for energy - a situation that places closely-held firms in a position to supply that much-needed capital.
Private investors have been hunting for potentially cash-rich utility assets for several years. The best deals, at present, may be those enterprises that are currently strapped but which have the potential to pull out. At least that's Icahn's thinking - a theory that may prompt other, like-minded go-getters to consider the same.
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