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Dynegy Faces Asset Sales, Bond Talks, Absent Approval of Blackstone Deal

Dynegy Inc. shareholders will vote today whether to accept Blackstone Group LP’s sweetened $604.5 million takeover bid. The outcome is too close to call and rejection would force the power producer to renegotiate debt and search for another buyer, analysts said.

Blackstone raised its offer by 50 cents a share yesterday from an August bid in an attempt to overcome opposition from Dynegy’s two largest shareholders, billionaire investor Carl Icahn and hedge fund Seneca Capital. The $5 offer is an 80 percent premium to Dynegy’s stock price before the board’s Aug. 13 announcement that it had accepted the buyout.

Whether the required majority of shareholders will take the higher offer when the vote is held in Houston is difficult to predict, Charles Fishman, a Falls Church, Virginia-based analyst for Pritchard Capital Partners LLC, said in an interview yesterday.

“I’m sure that by Blackstone’s calculations this is what’s needed to put them over the goal line,” Fishman said. “Is that enough? I don’t know.”

Under the revised offer, Blackstone will get $16.3 million, or 13 cents a Dynegy share, if shareholders reject the takeover and the company sells itself for more than $4.50 a share within 18 months, Dynegy said today in a statement announcing it had accepted the new terms.

Photographer: Rick Maiman/Bloomberg

Billionaire investor Carl Icahn, chairman of Icahn Enterprises LP, attending a gala in New York. Close

Billionaire investor Carl Icahn, chairman of Icahn Enterprises LP, attending a gala in New York.

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Photographer: Rick Maiman/Bloomberg

Billionaire investor Carl Icahn, chairman of Icahn Enterprises LP, attending a gala in New York.

Still Too Cheap

Seneca and Icahn rejected the new bid yesterday as still too cheap. At $5 a share, Icahn’s profit on Dynegy stock would be $2.5 million, based on regulatory filings, compared with a loss at $4.50. Seneca also would profit at $5 a share, compared with a loss at the earlier price, according to filings.

The extra 50 cents a share “makes little material difference” to a shareholder trying to decide whether to hold until rising power prices revive the stock, or sell before the company runs out of money, Julien Dumoulin-Smith, a New York- based analyst for UBS Securities LLC, said yesterday in an interview.

A majority “no” vote would leave opponents of the deal pressing for cost cuts, asset sales and refinancing to pump the stock above Blackstone’s $5 offer price.

Dynegy said Blackstone’s is the only proposal, after a two- year search for alternatives and a monthlong solicitation for a higher bid, with a guaranteed value for common shareholders.

Tumbling electricity prices and rising fuel costs helped drive down Dynegy shares and leading last month to its sixth quarterly loss in two years. Without higher prices or lower costs, the Houston-based power producer may consume $680 million of cash next year and a total of $2.32 billion in five years, Dumoulin-Smith estimated.

Share Drop

Dynegy rose 2 cents to $5.04 at 9:44 a.m. in New York Stock Exchange composite trading. It has dropped 44 percent this year.

The company said in a Nov. 8 statement it may need to sell stock, further cutting the value of existing shares, unless it’s purchased by Blackstone.

JPMorgan Chase & Co. analyst Andrew Smith raised his rating on the stock to a buy from a hold on Nov. 15, saying it’s worth about $7 under financial plans proposed by its biggest shareholders.

Seneca’s Douglas A. Hirsch has proposed four new people to serve on Dynegy’s six-member board. The Seneca plan calls for a possible sale of the company or assets, capital restructuring and cost cutting.

Line of Credit

Icahn has offered Dynegy a $2 billion line of credit, a proposal that Blackstone would give him the ability to force the company into bankruptcy and buy it.

Dynegy doesn’t face a real cash crunch until 2016, when $1.6 billion of bonds come due, Smith wrote. It should be able to refinance its bank loans and a credit line it’s not using before then, he wrote.

“It’s possible that it takes four years before we see any power-market improvement,” Smith wrote. “It’s too soon to assume all the market fundamentals will go against Dynegy for the next four years.”

UBS estimates Dynegy would be worth $12 a share with a “modest” recovery in power prices and aggressive cost cutting by the company.

Breaking up the company over two or three years would yield about $9 a share, Pritchard Capital’sFishman said in a Nov. 15 note.

Defeat of the Blackstone offer probably would enable Seneca, the largest shareholder, to place at least two of its own nominees on the board, analysts said.

Board Members

One of the nominees, E. Hunter Harrison, former chief executive officer of Canadian National Railway Co., may help Dynegy drive a better contract with the Burlington Northern Santa Fe unit of Warren Buffett’s Berkshire Hathaway Inc. for shipping western coal to Midwest plants, UBS said.

The second nominee, Jeff Hunter, chief financial officer of closely held US Power Generating Co., an owner of New York generating plants, may help cut costs, the analysts said.

Four proxy advisory firms split evenly over their recommendation on the vote. Institutional Shareholder Services Inc. 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, saying refinancing is a better option for shareholders.

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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