Back in November, Dynegy (DYN) had what sounded like a great idea: Buy Enron's flagship trading business in natural gas and electricity, and immediately become the dominant force in those markets. Dynegy fled when Enron started to collapse under an avalanche of scandal. Now, Zurich (Switzerland)-based UBS Warburg (UBS) is making the same bet, albeit for a lot less money.
The question now: Will the conservative bank be able to impose Swiss order on the rogue Texas company's traders? On one level, the deal doesn't seem completely farfetched. Enron's gas and electricity trading actually seems to have made money. Other bankers who checked it out estimate the trading operations racked up $3 billion in pretax profits over the past two years (see BW, 2/11/02, "Enron: How Good an Energy Trader?").
Still, UBS had good reason to go for a deal that gave it 67% of future pretax profits for a pledge only to pay the salaries of 625 Enron employees. Obviously, the Enron name is mud, and getting people to trade with the company will be difficult enough. But managing Enron's swaggering traders -- its core asset -- could turn out to be even harder.
CULTURE CLASH. Enron may be on its last legs, but its masters-of-the-universe culture lives on, say insiders. "Even after going down in flames, a lot of these people have undiminished confidence in their ability," says a former Enron trader who asked not to be named. Competitors doubt that people who earned as much as $1 million a year in the freewheeling, high-risk Enron culture will be grateful to become a small piece of UBS's massive fixed-income business.
Although many have signed contracts with UBS that prevent them from leaving Enron for an undisclosed period, "they're all exploring their options," says one banker privately. Indeed, some traders are talking about trying to buy the trading unit back from UBS after it gets going again. UBS says it's not worried about rogue traders. "We're confident in the people we have hired," says Michael Hutchins, global co-head of credit fixed income at UBS Warburg.
For the scheme to work, however, UBS must persuade Enron's traders to accept its risk-management practices. And that will be tough: One reason Enron's traders made so much is that they took big risks. Analysts estimate that Enron was willing to put as much as $66 million at risk on a trade, vs. $12.2 million at Dynegy or $16 million at Duke Energy. UBS Warburg is willing to put up to $131 million at risk in all of its deals with a single trading partner, but insiders says its energy traders won't be allowed to risk "anything like that" on a single trade.
"SMOOTHING ELEMENT." UBS officials insist that they have no rosy delusions about the investment. That's partly because they had been researching the energy-trading business for more than a year as a way of diversifying the bank's trading income. "Earnings in the energy-trading business do not depend on developments in the capital markets, so they could work as a smoothing element," says UBS President Peter A. Wuffli.
That's in fact what motivated UBS to send a small team down to Houston when Enron put the business up for sale after the bankruptcy filing. Even after federal antitrust authorities give the final go-ahead, the Swiss bank says it plans to take things slowly. "We don't know how quickly this is going to start up," says UBS CEO John Costas. "We'd be happy in the first year if this business is half as big as it had been historically."
Still, anything associated with Enron is arguably fraught with risk at any price. "It's not clear how successful UBS is going to be," says Jeff Dietert, an analyst at investment bank Simmons & Co. in Houston. "And I think UBS knows that. That's why it wasn't willing to pay anything up front."
Some industry insiders doubt that Enron's traders will prove to be exceptional under the new rules. But UBS isn't about to change its own way of doing business. "Entering into energy trading does not mean extending our appetite for risk," says Wuffli. Swiss family Enron? Don't bet the chalet on it. By Emily Thornton in New York, David Fairlamb in Zurich, and Stephanie Anderson Forest in Dallas