Dynegy Debate Intensifies in Hours Before Vote on Takeover by Blackstone

Dynegy Inc. shareholders will vote tomorrow on whether to accept a $4.50-a-share buyout offer from Blackstone Group LP or bet that the Houston-based power producer can rebound after its sixth quarterly loss in two years.

Advice to shareholders has been contradictory. Institutional Shareholder Services Inc., an investor-research firm, recommended a “yes” vote last week for the $540 million deal, saying the stock may be worth as little as $2.66, an eight-year low, without Blackstone’s offer to prop it up.

JPMorgan Chase & Co. analyst Andrew Smith yesterday told clients to buy the stock because it might rise as high as $7 if Dynegy’s two largest shareholders succeed in defeating the takeover and installing new management supported by a $2 billion line of credit.

“I don’t know what the outcome is going to be,” Charles Fishman, a Falls Church, Virginia-based analyst for Pritchard Capital Partners LP, said in an interview yesterday. “It’s going to be close.”

Dynegy’s board announced Aug. 13 it had accepted the Blackstone offer, which was 62 percent above the previous day’s closing price and is valued at $4.7 billion including debt. Dynegy said yesterday Blackstone’s is the only proposal, after a two-year search and a monthlong solicitation for a higher bid, that “provides certain value for our common shareholders.”

“There is a material chance” the bid will be rejected, Julien Dumoulin-Smith, a New York-based analyst for UBS Securities LLC, wrote today in a note to clients. Dumoulin-Smith wrote that he believes the deal will be approved by a simple majority of shareholders.

Icahn’s Opposition

Billionaire New York investor Carl Icahn declared the Blackstone bid too low on Oct. 12. Hedge fund Seneca Capital, holder of 9.3 percent, joined Icahn a week later in opposing the offer. Icahn yesterday disclosed his stake had risen from 10 percent to 14.5 percent, including 5.5 million call options, making him Dynegy’s largest shareholder.

Seneca’s Douglas A. Hirsch asked shareholders in a filing yesterday to replace two of Dynegy’s six board members with its own candidates through a process called a consent offering that requires approval by a majority of all outstanding shares and a 60-day notice to the company.

Seneca may join with RRI Energy Inc. to offer more than $6 a share for Dynegy if the Blackstone bid is rejected, the Wall Street Journal reported today, citing unidentified people familiar with the matter.

Split Advice

Lisa Wolford, a Seneca spokeswoman, had no immediate comment on the report. Laurie Fickman, a spokeswoman for Houston-based RRI, didn’t immediately return a voicemail message left before regular business hours.

Dynegy rose 3 cents to $4.66 at 9:36 a.m. in New York Stock Exchange composite trading. The shares have closed above Blackstone’s $4.50 offer price on every day except for four in the three months since the purchase was announced.

Four proxy advisory firms split evenly over their recommendation on the vote. ISS and Egan-Jones Ratings Co. support the buyout, saying that while shareholders may be disappointed in the price, they otherwise face the risk of bankruptcy if power markets don’t improve. Proxy Governance Inc. and Glass Lewis & LLC recommended a “no” vote.

Credit Line

JPMorgan’s comment that the shares will rise was prompted by proposals last week from Icahn and Seneca. Icahn offered a $2 billion line of credit to keep Dynegy liquid and avoid the Blackstone sale. Seneca nominated a former rail executive and a power executive to replace Chief Executive Officer Bruce Williamson and David Biegler on Dynegy’s board.

“Seneca’s last-minute proposal to nominate two directors is a desperate attempt to derail the Blackstone transaction based on hopes and assumptions about future energy prices, the timing of the implementation of Clean Air regulations, and other factors that neither Dynegy nor Seneca control,” David Byford, a Dynegy spokesman, said Nov. 11.

Two others are also willing to serve on the board if any Dynegy directors resign, Seneca said in yesterday’s filing.

The profit outlook for Dynegy has improved since the board accepted the Blackstone offer because of higher forward prices for electricity and lower coal prices, Seneca said in the filing.

Icahn’s offer of a credit line would buy time for new management to restructure debt or sell assets before a cash crunch hits, JPMorgan’s Smith wrote.

In a statement yesterday, Blackstone said Icahn may use his “privileged position” as a creditor to force bankruptcy and take over Dynegy. “Adding more debt is not a step that results in greater shareholder value,” Byford said in a statement.

Breaking Up Dynegy?

If shareholders reject Blackstone’s offer, the new directors and new management may break up Dynegy over the next two or three years, yielding about $9 a share, Pritchard Capital’s Fishman wrote in a note to clients yesterday. He maintained his neutral rating on the stock.

NRG Energy Inc., Texas’s second-largest power producer, agreed to pay $1.36 billion for Dynegy plants in California and Maine, contingent on the Blackstone offer closing. Dynegy also has plants in the U.S. Midwest and Northeast.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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