Dynegy Accepts Icahn’s $665 Million Buyout Offer

Icahn Enterprises to Buy Dynegy for $665 Million
Exhaust rises from a stack at the 290-megawatt Hennepin Power Generation Plant, owned by Dynegy Inc. in Hennepin, Illinois. Photographer: Daniel Acker/Bloomberg

Dec. 15 (Bloomberg) -- Dynegy Inc., the third-largest U.S. independent power producer, agreed to be acquired for $665 million by Icahn Enterprises LP after shareholders rejected a lower bid from Blackstone Group LP.

Icahn Enterprises’ offer of $5.50 a share is 10 percent higher than Blackstone’s November bid of $5 a share. The agreement allows Dynegy to pursue a better offer until Jan. 24. Icahn has agreed not to oppose another buyer if Dynegy receives a higher bid.

Dynegy rose 18 cents, or 3.3 percent, to $5.63 at 4:25 p.m. in composite trading on the New York Stock Exchange.

Ichan Enterprises’ offer “sets the bar” for Dynegy’s auction process, and the stock “has value above and beyond $5.50”, Andrew Smith, a utility analyst at JPMorgan Chase & Co., said today in a research note to investors.

Carl Icahn and hedge fund Seneca Capital, Dynegy’s largest shareholders, opposed Blackstone’s offer to acquire the Houston-based company. A majority of Dynegy’s shareholders voted to reject the deal last month.

Seneca has said it values Dynegy at $6.50 a share. Lisa Wolford, who represents Seneca at Robinson Lerer & Montgomery, had no immediate comment. Dynegy did not say in a statement today whether Seneca supports the Icahn offer.

Icahn’s offer, if approved, would mean Icahn is paying two times Dynegy’s revenue and 8.62 times Dynegy’s trailing 12-month earnings before tax and other items, or ebitda, according to Bloomberg data. That compares to Blackstone’s bid that was 9.26 times ebitda and 2.11 times revenue.

Mounting Debt

Icahn’s offer is the median price of sector transactions over the past 10 years, based on ebitda and revenue multiples, according to Bloomberg data.

Dynegy has tried to sell itself for more than two years as it has contended with mounting debt. It currently has about $3.95 billion of outstanding debt. The company has reported losses for nine of the last 11 quarters.

After receiving Blackstone’s original offer of $4.50 on Aug. 13, Dynegy contacted 42 parties without receiving a higher bid, according to statements from the company. When Icahn and Seneca opposed the transaction with Blackstone, the private-equity firm raised its bid to $5.

Dynegy Chief Executive Officer Bruce A. Williamson called the agreement, “a very positive outcome for all Dynegy stockholders” in the statement.

Shareholder Approval Seen

Icahn’s bid also will need shareholder approval. If he’s successful, the purchase will be Icahn’s largest in 10 years including debt, according to Bloomberg data.

“He’s got a good shot at clearing this thing,” said Charles Fishman, a St. Louis-based analyst for Pritchard Capital Partners LLC.

Because 37 percent of the shareholders voted for the $5 Blackstone offer, and Icahn himself owns almost 10 percent, he’s likely to secure the approval needed for the acquisition to go through, Fishman said.

During debate over the Blackstone bid, Seneca began lobbying to obtain two Dynegy board seats for its own proposed candidates.

Seneca is still trying to obtain the board seats, and the placement of those two members could potentially disrupt Icahn’s tender offer, according to the listing of potential risks in today’s statement.

David Byford, a Dynegy spokesman, had no comment on Seneca’s position on Icahn’s offer.

Cost Cuts

Contracts protecting against the company’s default for five years increased 1.9 percentage points to 24.3 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $2.43 million initially and $500,000 annually to protect $10 million of Dynegy’s debt.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

Before Icahn’s bid, Dynegy said it might consider asset sales, cost-cutting, and debt restructuring to remain a standalone company.

The company may fetch a higher value if broken apart, said Fishman, who has a $7 price target and a buy rating on Dynegy.

“Is the company worth more? Probably,” he said.

Breakup Likely?

A private company such as Icahn Enterprises may have flexibility that Dynegy’s board lacks, enabling it to parcel out segments of Dynegy for sale, Fishman said.

“The maximum value you would get for this company would be in breaking it apart. That would be what Carl Icahn, assuming he’s successful, is likely to do.”

Sale of the company at more than $4.50 a share within 18 months of Blackstone’s November offer will trigger a $16.3 million payment to Blackstone, according to its agreement with Dynegy.

Dynegy owns plants in seven U.S. states with the capacity to power about 9.8 million average U.S. homes.

Independent power producers sell power into wholesale markets, subjecting the companies to price fluctuations. Regulated utilities are generally insulated from market volatility. NRG Energy Inc. and Calpine Corp. are the two largest U.S. independent power producers.

To contact the reporters on this story: Jessica Resnick-Ault in New York at jresnickault@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net;

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