Western Resources

(WR)

appears to be waving the white flag. Problem is, it's not clear whether any of its potential captors are paying attention.

After losing a long battle to acquire

Kansas City Power & Light

(KLT)

, the Kansas-based power and consumer-services company is looking for a partner to help it -- and its beleaguered Chairman David Wittig -- regroup. The company has retained

Salomon Smith Barney

and

Chase Securities

to find a suitor.

This once-highflying Midwestern powerhouse has fallen on hard times, largely a result of its attempt to diversify into nontraditional businesses such as home security. And, while the electric utility is the company's breadwinner, it sees little choice but to sell to the highest bidder.

"Ironically, the utility operation is a solid, profitable operating business," says Tom Hamlin, utility analyst at

First Union Securities

, which has done banking for Western. "However, it's the only thing Western has for which there may be a buyer," said Hamlin, who recently downgraded Western to hold.

Wittig -- who recently received a contractual bonus payment of more than $5 million even though the market value of the company has dropped more than 50% since he seized control -- says the moves come when he realized the chances of transforming Western into an independent powerhouse were slim. "Our electric operations, while solid, are becoming comparatively smaller as the industry consolidates," the former Wall Street deal maker said in a statement. "While we have extremely valuable assets, particularly on the generation side, these assets need to be part of a larger business."

While Wittig's postulate that bigger is better is a correctly learned behavior from the early days of electric deregulation, it has to make strategic sense for a potential partner to act. And, as Western sits today, a number of roadblocks stand in the way of a profitable deal:

The first is regulation. Western's power assets are held in Kansas, where state regulators appear reluctant to let go of their stranglehold on the power industry. Frankly, while there is plenty of blame at Wittig's feet, the

Kansas Corporations Commission

is, in large part, responsible for dimming the lights on Western's merger with KCP&L. Any deal would have to be approved by the KCC, which should scare plenty of suitors away. "The Kansas regulatory environment is a nightmare," says

Donaldson, Lufkin & Jenrette

analyst Jay Dobson. "It makes a good deal darn near impossible."

The second hurdle is the balance sheet. Western has $3 billion in debt (exclusive of the

Protection One

(POI)

debt it has assumed), all of which it assigns to the utility portion of the business. Hence, any purchaser would have to be comfortable in assuming the debt, which, at 1.5 times the equity of the utility, is high even by utility standards. "That's a lot of debt for any buyer to assume," says First Union's Hamlin.

The third uncertainty is franchise rights. The city of Wichita is the largest customer of Western's Kansas Gas & Electric affiliate, providing more than 40% of KG&E's annual revenue, according to a Western spokesperson. And, the city is considering pulling the plug on KG&E's franchise rights when the current agreement expires in March 2002.

"We are considering all options, including municipalizing," says a high-ranking city finance official. "KG&E will have to make an attractive proposal to keep our business." Any company looking to purchase Western's power assets will need some assurance that Wichita will remain a customer, regardless of how hollow the threat by city officials.

"

Municipalization would be nearly impossible for Wichita," says First Union's Hamlin. "However, it does create a problem if Western wants to sell the utility."

Those three strikes suggest a difficult sale for Western. "At the end of the day, it will be difficult for Western to get a deal done," says one utility-fund manager who holds a position in Western stock. "There are too many uncertainties for the company to get a good price."

Still, some think a handful of companies may be looking at Western. "If it once made sense, maybe the reverse still makes sense," says Hamlin, suggesting KCP&L might make a run at Western.

Other names that seem universal include St. Louis-based

Ameren

(AEE) - Get Report

and Wisconsin-based

Alliant

(LNT) - Get Report

. "

Both are wild cards," says DLJ's Dobson. "Both have said they are interested in acquiring assets in the region, but both have been slow to do so."

And, Dobson says,

Oklahoma Gas & Electric

parent,

OGE Corp.

(OGE) - Get Report

and Dallas-based

TXU Corp.

(TXU)

are possibilities. As it stands, the odds are long for any deal at this point," he added.

While some suggest Kansas City-based

UtiliCorp

(UCU)

might have an interest, Dobson says Utilicorp is looking for faster-growing opportunities. "They've had it with trying to acquire slow-growing utilities."

Another interesting name in the background is

Mid-American Energy

, the Iowa-based utility recently privatized with the backing of

Warren Buffett's

Berkshire Hathaway

(BRK.A) - Get Report

. Buffett recently indicated Berkshire would explore other investments in the power industry. And, sources tell us that Mid-American has recently sniffed around Western's generation assets. Neither Western nor Berkshire would comment.

If a deal is done, what is it likely worth? First Union's Hamlin values Western utilities operations at close to $15 a share. For Buffett, the price would have to be lower, likely around $12 a share. "It's an interesting proposition," says the fund manager. "Unlikely, but certainly possible."

Wittig's Payday

What has David Wittig done for Western Resources shareholders?

As shown by the dark line on the chart, since Wittig assumed control of the company in March 1996, Western stock has fallen nearly 60%. Even more painful, as the lighter line shows, Western has underperformed the

Dow Jones Utility Average

by nearly 80%.

For his trouble, Wittig received nearly $5.8 million in other compensation in 1999, payments a Western spokesperson says are "a result of the fact his earnings potential was reduced when he left Wall Street and the board's desire to retain him."

In light of the recent events, DLJ's Dobson quipped, "It appears Wittig has pretty good control of his board."

However,

Deutsche Bank Alex. Brown

analyst Ed Tirello, a longtime Western bull, found an explanation. "It's not like he's made a lot of money here," says Tirello, who rates Western a strong buy and has not provided banking services to the company. "The payment just about makes up for all his losses in Western stock."

Other Western shareholders continue to wait for their checks.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds had no 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 .