Dynegy Incorporated (DYN) began as a natural gas marketer called Natural Gas Clearinghouse in1984. It entered the independent power producer industry in 1997 with the purchase of Destec Incorporated. The company changed its name a year later, to Dynegy Inc. In 2000, the company continued its expansion by merging with Illinova. In 2002, after a major restructuring, Dynegy announced its exit from the energy marketing and trading business. Then, in 2005, the company sold its Midstream Natural gas business in order to focus on the power generation sector. In 2006, it completed the restructuring process by announcing a merger with LS Power. Finally, in 2009, under stressful financial circumstances, the company announced the sale of 4,800 megawatts of generation assets. Unfortunately, the company continued to suffer losses due to weak electricity prices, and has now agreed to be acquired by Blackstone Inc.
It is because of this proposed acquisition that the company has been in the news recently. The initial purchase announcement took place on August 13, 2010, when The Blackstone Group (BX) offered to acquire Dynegy for $4.7 billion, including debt. Blackstone offered approximately $4.50 for every Dynegy share. A major component of the transaction was Blackstone selling four of Dynegy’s natural gas-fired assets to NRG Energy (NRG) for $1.36 billion, leaving Blackstone with two-thirds of Dynegy’s generation capacity.
Recently, Dynegy reported Federal Energy Regulatory Commission approval for the deal, leaving shareholder approval as the major obstacle to the completion of the acquisition. However, this may be harder to get than initially anticipated as two new players have come into the picture--Seneca Capital bought a 9.3% stake and Carl Icahn purchased a nearly 10% stake in the company. Both have expressed their dissatisfaction with the deal, with Icahn asserting that the Blackstone bid is too low and that the company should push for a higher bid to seal the purchase. Most recently, Icahn has stated that he will be opposing Blackstone’s bid on Dynegy during the voter approval process, and has offered up to $2 billion in credit to the Dynegy board if the merger falls through. He has also bought options on Dynegy shares to increase his ownership from 10% to 13% of the company’s shares.
In turn, the Board of Directors has reiterated its statement that Blackstone is the only proposal that Dynegy has had, with no rival bids appearing during the 40 day “go-shop” period. Furthermore, management expects significant negative free cash flow between 2011 and 2015 due to the company’s considerable leverage. These two factors will add to a very challenging liquidity position over the next few years, should the company remain a stand-alone entity. Finally, much of the current stock recovery is driven by the news of this impending acquisition, and it is a very real possibility that the stock price could sharply fall to or below its pre-announcement price of $2.78 a share, if the deal is not completed. Though Dynegy is currently trading above the offered purchase price of $4.50 a share, in the hopes that the purchase price will be increased, thus far, Blackstone has refused to up its $4.50-a-share bid on Dynegy. Shareholders will be voting on November 17th to approve or vote down the merger and given the uncertainty surrounding this stock, investors should probably steer clear at this point in time. Shareholders should strongly consider selling before the vote to lock in any gains—the potential gains that the current shareholder activism might unlock are likely outweighed by the potential losses that would be experienced should the deal fall apart.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.