As it turns out, analysts had a hard time gauging what price
would have to pay for embattled
trading business, because there isn't one.
Not only is UBS not paying Enron
up front for the trading business, Enron will also cede all ownership in the once-dominant trading business. And to further show the deterioration in Enron's current business,
The Wall Street Journal
reports that UBS will not assume any of Enron's current trading positions.
According to sources, when Enron releases the details of its sale today, it will say it is
its trading business to UBS and hoping for a return in the future. In fact, UBS will get the trading platform and some employees -- taking a payroll liability from Enron -- and give Enron nothing in return.
That UBS is providing little, if anything, upfront and is making no guarantees regarding future profits speaks volumes about how quickly any residual value in Enron's business has eroded and about what shareholders can expect from the ultimate outcome. "This has to be very disappointing to Enron's creditors and sends a strong message to Enron shareholders," says Jeff Dietert, power analyst at Simmons & Co. and a member of the
Though details weren't out as of this writing, sources in a creditors meeting held this morning in New York confirm that the deal calls for UBS to provide Enron with a percentage -- said to be one-third -- of the profits from the energy-trading business to Enron for the next 10 years.
UBS will have the option to reduce or eliminate Enron's profit-sharing position by paying a multiple of Enron's share of the profits during the first five years of the agreement. If UBS elects to continue payments to Enron over the entire 10-year term, profit-sharing will increase in each of the last five years of the agreement.
While the Enron spin machine will put its best face on the transaction, there is little positive in the deal for the bankrupt company. Enron once hoped the trading unit -- which at one point accounted for more than 90% of its revenue -- would fetch nearly $1 billion in an auction, with Enron retaining an equity stake in the revival.
Instead, the trading business is penniless, leaving Enron looking more and more like a corporate pauper.
As suggested Friday, the uncertainty of a resurrection not only caused a dearth of bidders -- only UBS and
were serious in their pursuits -- it also tarnished the potential value of Enron's gem.
"It's like they are starting over," says Dietert. "We are talking about a business that will be a small fraction of its former self and will take a lot of time to rebuild."
And with online competitors like the Intercontinental Exchange and
Dynegy Direct, it isn't clear how quickly, if at all, UBS can rebuild the vitality of the Enron platform.
However, it isn't costing UBS much to try. And with Enron holding no ongoing ownership interest, UBS may have a chance to leave Enron's tarnished past behind. "If Enron had any ownership, it would have been very difficult to rebuild the business," says an official with a competing energy trader and Enron creditor who wished to remain unnamed. "Sharing the profits is still a stigma, but not nearly what it could have been. It will still be a tough comeback."
And creditors aren't likely to make it any easier. While still reviewing the details, the power-trading official said creditors have concerns. "We need to know how they define profit, how UBS plans to rebuild and market the business and what happens to the profits once paid to Enron," he said. "Creditors are owed billions, and there has to be some assurance profits will go toward making creditors whole."
The deal has to be approved by Judge Arthur J. Gonzales of the U.S. Bankruptcy Court in Manhattan. He has scheduled a hearing on the deal for Friday, and creditors are expected to raise a myriad of objections.
Regardless of approval, analysts remain skeptical about the ability to re-energize the once-dominant player in the energy-trading business. "There is only about a 1%, 2%, maybe 3% probability that the old Enron business re-emerges as a major player among energy traders," says Jay Dobson, managing director of electric utility research at Deutsche Bank Alex. Brown.
This auction outcome has to leave Enron's creditors -- and especially shareholders -- feeling powerless.
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 and invites you to send it to