Updated from 7:55 p.m. ET
Including Enron's nearly $15 billion in debt, the deal is worth between $23 billion to $24 billion, "depending on your calculations," Dynegy CFO Rob Doty said on a Friday evening conference call. Announced after Friday's market close, the deal has the smaller Dynegy acquiring Enron in an all-stock transaction, giving Enron shareholders 0.2685 shares of Dynegy stock for each share of Enron. That puts the deal at just over $10.40 per Enron share.
To make the agreement less taxing on Dynegy's balance sheet, ChevronTexaco (CVX) - Get Chevron Corporation Report, which currently holds a 26.5% interest in Dynegy, has agreed to provide an additional $2.5 billion in equity capital to Dynegy. Of that sum, $1.5 billion of that investment will be made immediately available and passed through to Enron as asset-backed equity financing. ChevronTexaco's remaining $1 billion would come at merger closing.
According to the announcement, Chevron will be granted rights to purchase an additional $1.5 billion in Dynegy common stock over a period of up to three years from completion of the merger. It isn't clear at what price the investment would be made or if certain events would trigger ChevronTexaco to act.
Dynegy Chairman and CEO Chuck Watson said the ChevronTexaco partnership was key to making the deal work. "It's always nice to have a 26% partner with the strength of AAA credit like ChevronTexaco," he said on the Friday evening call. "They have been a strategic partner and in every deal we have done they have always grossed up their capital to keep their investment."
The immediate equity infusion is very important to Enron, which has seen its credit rating plummet to near-junk status in recent weeks as the company's off-balance sheet antics have raised suspicions of creditors and the Securities and Exchange Commission. Enron has $13 billion in debt on its balance sheet with billions more in potential liabilities in off-balance sheet partnerships. In recent days, rumors of insolvency have increased as reports of Enron missing margin calls with trading partners have been confirmed.
On Thursday, Enron restated earnings back to as far as 1997, with reductions of more than 20% as a result of accounting errors. Speculation that there is more for Enron to disclose was fueled by Enron Chairman Ken Lay's refusal to answer specific questions about recent financial dealings and related-party transactions except to say that the company would have a conference call this coming Wednesday to further discuss the partnerships.
Watson and his team looked very carefully at the lawsuits and the SEC inquiry and tried to evaluate the entire scope of that," was the only comment Lay made regarding Enron's recent partnership and accounting troubles.
Dynegy's interest in a deal could come from its significant exposure to Enron. While the company has not provided the extent of its exposure to Enron, Dynegy could have faced serious disruption and large losses because the two firms are trading partners on a number of contracts. In such a relationship, Dynegy could have contracts to purchase a commodity like power or natural gas from Enron and be committed to sell that commodity to another buyer.
If Enron failed to deliver, the domino effect could have a significant economic impact on Dynegy. While other energy trading firms have exposure, sources speculate Dynegy's exposure is more significant than its peers'. While refusing to provide specific data, Dynegy's Watson downplayed the significance of the Dynegy-Enron trading relationship in striking the deal.
According to the merger announcement, the combined company is expected to have revenues exceeding $200 billion and $90 billion in assets. Together, the companies have gas sales of approximately 40 billion cubic feet per day through the third quarter of 2001 and power sales exceeding 500 million megawatt hours through the third quarter of 2001. In addition, the new Dynegy's delivery network will include more than 22,000 megawatts of generating capacity and 25,000 miles of pipelines.
Dynegy says the deal will provide "significant earnings accretion" in the first year after the merger. In the statement announcing the merger, Dynegy says its 2002 pro forma earnings should be in a range of $3.40 to 3.50 per share. "This represents accretion of 35% or $0.90 to $0.95 per share to current Dynegy shareholders before taking into account expected merger synergies and cost savings," the statement said.
Dynegy says it expects $400 million to $500 million in recurring savings from the merger as a result of the discontinuation of Enron's noncore businesses and other cost reductions.
The combined company plans to pay an annual dividend of 30 cents per common share. The new company will retain the Dynegy name. The board of directors will have 14 members. Dynegy's 11 designees will include three from ChevronTexaco. Enron will have the right to designate a minimum of three board members.
Lay said Friday evening that he will not take an active management role after the merger and has not decided whether to take a position as a member of the new Dynegy board.
Chuck Watson, Dynegy chairman and CEO, and Steve Bergstrom, Dynegy president, will retain their positions at the head of the merged companies as will Rob Doty, the company's current CFO. The only Enron senior executive to make the transition is Greg Whalley, currently president and COO of Enron, who will become an executive vice president.
Watson said that the companies should be able to complete the necessary regulatory approval processes and close the transaction in six to nine months, although he did note there were a number of provisions that would allow Dynegy to walk away from the deal. "We have some specific escape clauses and some general but I wouldn't be standing here in front of you if I expected to see any of that," he said. "Obviously, to protect shareholders we had to put some backouts in."
If the deal cannot close, Dynegy will have the option of acquiring Enron's Northern Natural Gas pipeline operation, which would secure the initial $1.5 billion cash infusion.
Enron stock closed the day up 22 cents at $8.63 while Dynegy finished higher by $2.26 at $38.76. Both stocks were halted in after-hours trading. The companies have scheduled a 9 a.m. investor presentation for Monday to further outline details of the merger.