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Dynegy May Sell in Pieces After Blackstone Bid Fails

Dynegy Inc., the third-largest U.S. independent power producer, may need to sell itself piece by piece after Blackstone Group LP’s $604.5 million offer to buy the whole company was rejected, analysts said.

A majority of shareholders in Houston-based Dynegy, heeding opposition from Carl Icahn and hedge fund Seneca Capital, yesterday voted down the $5-a-share Blackstone bid. The company is seeking a new buyer and proposed immediate talks with Icahn and Seneca, its two largest shareholders. Dynegy also said it would consider asset sales, cost cutting and debt restructuring to remain a standalone company.

Dynegy’s board erred in trying to find buyers for the whole company, rather than selling off individual plants to those willing to pay a premium, said Charles Fishman, an analyst for Pritchard Capital Partners LLC. The failed bid, valued at $4.77 billion with debt, included an agreement for Blackstone to sell two Dynegy power plants to NRG Energy Inc. for $1.36 billion, more than twice the cash offer price for the whole company.

“One of the problems here is that the board set up a system that rewarded management for finding a buyer as opposed to breaking the company apart,” St. Louis-based Fishman, who rates Dynegy shares at “buy” and owns none, said yesterday in an interview. Breaking up Dynegy is “the way to do this thing,” he said.

Selling Assets

The company may be worth $9 a share if it’s broken apart, Fishman wrote in a note to clients yesterday. Selling off the company’s assets could take several years and provide more value to shareholders, he wrote.

The shares rose 13 cents, or 2.6 percent, to $5.13 at 4:02 p.m. in New York Stock Exchange composite trading. Dynegy closed at an eight-year low of $2.78 a share the day before the Blackstone offer was announced on Aug. 13.

Dynegy sought a buyer for two years before the Blackstone offer and contacted 42 potential bidders during the month after the agreement was announced, according to a Nov. 18 filing. Eight of those approached signed confidentiality agreements. No counteroffers emerged.

The company yesterday adopted a plan that would protect it from a takeover that isn’t approved by the board. The plan goes too far in limiting additional purchases of stock, Seneca said in a statement today.

NRG agreed as part of the Blackstone bid to buy Dynegy’s natural-gas fired plants in California and Maine. NRG didn’t want the whole company and it would offer Dynegy less for the plants now because power prices have fallen, NRG Chief Executive Officer David Crane told investors in a Nov. 4 conference call.

Icahn Bid?

Meredith Moore, a spokeswoman for Princeton, New Jersey-based NRG, didn’t respond to a voicemail message seeking comment.

Icahn, Dynegy’s largest shareholder, said in a Nov. 16 statement he might bid in a new auction. Sale of the entire company at more than $4.50 a share within 18 months would trigger a $16.3 million payment to Blackstone under terms of a revised $5-a-share offer accepted by Dynegy’s board last week.

Icahn didn’t return phone calls seeking comment.

Seneca has proposed selling plants and refinancing debt. Chief Investment Officer Scott Pearl, a former Credit Suisse First Boston utility analyst, has assembled a team that can find buyers and put together deals as markets for power and fuel improve, Fishman said.

Dynegy may get a buyout offer of more than $6 a share from Seneca and another investor, the Wall Street Journal reported, citing unidentified people, and without naming the other bidder.

‘Highly’ Doubtful Bid

Dynegy “has been on the block for years and we highly doubt that a superior offer will be coming, especially from strategic investors,” Angie Storozynski, a New York-based analyst for Macquarie Capital USA Inc., said in a note yesterday.

She cut her price target to $4 from $4.50 and downgraded the stock to “underperform” from “neutral,” saying the company’s debt and low forward power prices may cause it to lag peers.

In its campaign against Blackstone’s bid, Seneca proposed nominating E. Hunter Harrison, former chief executive officer of Canadian National Railway Co., and Jeff Hunter, chief financial officer of closely held US Power Generating Co., to replace two people on Dynegy’s six-member board. Dynegy yesterday offered Seneca one seat on an expanded seven-member board.

Seneca reiterated today that it was seeking two board seats.

Cutting Costs

Barclay’s Capital analyst Greg Orrill raised his target price for the stock to $6 from $5, predicting Dynegy will find $50 million in additional cost cuts next year and earn as much as $150 million on the plants Blackstone had planned to sell, according to a note to clients yesterday.

Dynegy owns plants in seven U.S. states with capacity to power about 9.8 million average U.S. homes. The company may sell plants and use the proceeds to buy back portions of its $4.5 billion of debt at a discount, Andy DeVries, an analyst for CreditSights Inc. in New York, said in an e-mail.

Interest payments consumed about 12 percent of Dynegy’s third-quarter sales, contributing to its sixth quarterly loss in two years. It has forecast negative cash flow of $1.6 billion during the next five years to pay debt and keep its plants running.

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

Dynegy is relying on the same set of advisers it used for the Blackstone offer for its newest round of bid solicitation. Goldman Sachs Group Inc. and Greenhill & Co. are Dynegy’s financial advisers and Sullivan & Cromwell LLP is legal counsel.

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