Blackstone’s Dynegy Bid Scrapped, Other Offers Sought

Billionaire Investor Carl Icahn
The Blackstone bid was opposed by billionaire investor Carl Icahn and hedge fund Seneca Capital, the two largest shareholders of Houston-based Dynegy, who said the company was worth more. Photographer: Rick Maiman/Bloomberg

Dynegy Inc., the third-largest U.S. independent power producer, agreed with Blackstone Group LP to scrap a $604.5 million takeover because of shareholder opposition. Dynegy will seek new bids and may sell assets, cut costs and restructure debt to continue as a standalone company.

Blackstone’s offer to buy the power producer failed to get majority approval during a shareholder vote today. The bid was opposed by billionaire investor Carl Icahn and hedge fund Seneca Capital, the two largest shareholders of Houston-based Dynegy, who said the company was worth more.

“We will immediately engage interested parties, including Seneca Capital and Icahn Associates, who may have an interest in making an offer to acquire Dynegy,” Bruce A. Williamson, chief executive officer of Dynegy, said in a statement. Talks with Seneca will include adding an independent board member, Dynegy said. The hedge fund had proposed replacing two board members.

Dynegy also adopted a shareholders’ rights program that would protect the company from a takeover that isn’t approved by the board, according to a separate statement today.

Blackstone, the world’s largest private-equity firm, will be eligible to receive a $16.3 million merger termination fee if Dynegy is sold for more than $4.50 a share within 18 months, said David Byford, a spokesman for the power producer.

Dynegy fell 14 cents, or 2.7 percent, to $5 a share at 4:15 p.m. in New York Stock Exchange composite trading. Blackstone fell 32 cents, or 2.4 percent, to $12.93.

42 Potential Buyers

Dynegy had contacted 42 potential buyers in pursuit of a bid higher than Blackstone’s without success, according to a Nov. 18 filing. A provision allowing Blackstone to match a superior offer and an exclusive $1.36 billion agreement selling some Dynegy plants to NRG Energy Inc. discouraged potential bidders, Icahn said in a Nov. 16 statement.

Lisa Wolford, a spokeswoman for Seneca, had no comment. Susan Gordon, an Icahn spokeswoman, didn’t respond to a message seeking comment.

Dynegy announced Blackstone’s initial $4.50-a-share offer on Aug. 13, a 62 percent premium to the prior day’s closing price. Responding to shareholder opposition, New York-based Blackstone last week raised its offer by 50 cents, to $5 a share. A day later, Dynegy extended the original voting period by six days to let shareholders consider the revised bid.

“While we are disappointed by Seneca Capital’s and Carl Icahn’s opposition to our ‘best and final’ proposal of $5 per share, we appreciate the efforts made by Dynegy to communicate the merits of our offer,” David Foley, senior managing director of Blackstone Group said in a statement.

$2 Billion Credit

Icahn, Dynegy’s largest shareholder, opposed the Blackstone offer because he said it undervalues the company. He has offered the company a $2 billion line of credit and said on Nov. 16 he may be willing to bid for it.

Seneca, based in New York, has said Blackstone was scooping up Dynegy on the cheap to profit by selling the plants once the economy revives power demand. Seneca holds a 9.3 percent stake.

“The plan of Icahn and the Seneca group is to take this thing, cut costs, and break apart the company,” Charles Fishman, a Falls Church, Virginia-based analyst for Pritchard Capital Partners LLC, said in an interview today. He rates the shares “neutral” and owns none.

Dynegy’s “value is more than $5” a share, said Fishman. The company may sell off its assets piecemeal if no new bidder emerges, he said.

New Board Member

In a Nov. 11 statement, Seneca said it would seek to nominate E. Hunter Harrison, former chief executive officer of Canadian National Railway Co. and Jeff Hunter, co-founder and chief financial officer of closely held US Power Generating Co., to the Dynegy board. It proposed looking for a new buyer, cutting costs and restructuring debt.

Dynegy said today it will “engage” with Seneca on “the immediate appointment of a qualified, independent candidate” to the six-member board.

Dynegy had predicted its shares would plummet from rejection of Blackstone’s offer, valued at $4.77 billion including assumed debt. The company has forecast negative cash flow of $1.6 billion during the next five years to pay debt and keep its power plants running.

The abandonment casts doubt on the agreement by NRG to buy two Dynegy plants for $1.36 billion from Blackstone. NRG Chief Executive Officer David Crane told investors Nov. 4 he wouldn’t offer as much for the Dynegy plants a second time because the outlook for power prices has fallen.

Lori Neuman, a spokeswoman for NRG, said the company had no comment.

More Challenges

“Dynegy continues to face challenges, many of which are beyond its control, including low and declining commodity prices and continued economic weakness,” Williamson said in a Nov. 8 statement. No higher offers for the company emerged during a monthlong shopping period after the Blackstone bid was announced in August.

Dynegy, worth almost $19 billion before it tried to swallow Enron Corp. in 2001, closed at an eight-year low of $2.78 a share the day before the Blackstone offer was announced.

NRG and Calpine Corp. are the two largest U.S. independent power producers.

Goldman Sachs Group Inc. and Greenhill & Co. are Dynegy’s financial advisers in the search for other bids. Sullivan & Cromwell LLP is legal counsel.

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