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Is Dynegy on the Block?

Tongues are wagging all over Houston about a possible deal.

Houston is abuzz with rumors that Dynegy (DYN) , the Houston-based energy conglomerate, is for sale, and some say a deal is imminent. "There's definitely something going on," one analyst told TheStreet.com, "And, it looks like the deal is near."

If so, it will certainly vindicate Chuck Watson, who, as Dynegy's CEO, has often lamented the fact that the company doesn't receive the same favorable valuation investors give

Enron

(ENE)

, Houston's largest energy trading company. A sale could be seen as one way to realize the company's hidden value, although Dynegy spokesperson John Sousa said it is the company's policy not to comment on rumors.

The Energy Daily

, a trade publication, reported today the suitor may be the

Williams Company

(WMB) - Get Williams Companies, Inc. Report

, an Oklahoma-based energy company focusing on oil and gas transmission and distribution. Williams also has a sizable investment in telecommunications. The company could not be reached for comment.

Some analysts believe Dynegy would make a nice fit for Williams. "It would go well with Williams' strategy to build their natural gas trading operations," says Michael Carter of

Resource Data International

, a Boulder, Colo., energy research and consulting firm. Carter says it wouldn't be a stretch for Williams -- which has a $21.5 billion market cap -- to purchase the much-smaller Dynegy, which has a market cap of just under $3 billion.

While Dynegy has recently received favorable reaction from Wall Street, its stock traded below 10 as recently as last summer. "Watson's done a good job of building value over the past year," says one analyst. "However, he realizes it will probably take something radical to jump to the next level." The stock closed today at 18, up 9/16. Earlier this year speculation had Dynegy involved in a three-way asset swap with

Unicom

(UCM)

and

TheStreet Recommends

Illinova

(ILN)

. While rumors of a deal between the two Illinois utilities persist, its less likely that Dynegy would be involved as analysts criticized the deal as too complex.

A recent

Power Lines discussed how Dynegy has worked to move its core business away from the volatile and thin-margin natural gas liquids business and toward more stable and profitable natural gas trading and electric generation trading. The changes have been rewarded by investors and are likely what caught Williams' eye. "They're very different companies, but have businesses that are very complimentary," says Carter. "The interesting hole in Williams is the lack of electric generation. Dynegy can fill that void." Dynegy has been aggressively buying and developing generation assets to complement its electric trading operations.

Another impetus for a Dynegy sale could be three large shareholders.

Nova

(NCX)

, a Canadian chemical company and owner of 26% of Dynegy, has said it would sell its stake this year. In addition, both

Chevron

(CHV)

and

British Gas

own similar stakes. Reports say British Gas has been contemplating a sale of its stake as well. All three would likely be interested in a sale if the price was right. And, if current utility merger premiums are applied to a Dynegy sale, the price could be in the mid-$20-a-share range.

While no timetable is certain, my sources say negotiations are in the final stages. "I'm told it's certain, it will happen," says one buy-sider. "We may walk in tomorrow and it could be all over the tape."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com. As originally published, this story contained an error. Please see

Corrections and Clarifications.