Enron in Takeover Talks With Dynegy

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Los Angeles Times

Enron Corp., the troubled energy-trading giant, was in talks Wednesday over a possible takeover by Houston neighbor and rival Dynegy Inc., industry sources said.

The boards of both companies were meeting late Wednesday concerning a potential deal, which almost certainly would mean the end of the line for Chairman and Chief Executive Kenneth Lay, architect of Enron‘s emergence as the dominant force in the relatively new electronic markets for natural gas and electricity.

The Houston Chronicle reported that ChevronTexaco Corp., which owns 27% of Dynegy, would inject an immediate $1.5 billion to enable Enron to maintain its investment-grade credit status, without which it would have to suspend its crucial trading operations.

Enron, Dynegy and ChevronTexaco representatives declined to comment.

Enron appeared to be running out of options short of an outright sale, as its stock had plunged toward 10-year lows, its credit had been downgraded and it had failed to secure emergency financing from parties that would let it retain its independence.

Enron‘s shares plunged again Wednesday but then recovered on the news, first reported by CNBC, that it had opened talks with Dynegy.

Enron shares sank as low as $7 on the New York Stock Exchange but rebounded to close down 62 cents at $9.05, still the lowest since April 1992; the stock is down 89% year to date. Dynegy shares also moved on the speculation, losing $3 to close at $33.

At Wednesday’s closing price, Enron has a market value of $6.8billion, down from an August 2000 peak of $63.6 billion.

The catalyst for Enron‘s shocking slide was the disclosure last month that the company had taken a $1.2-billion equity reduction connected with off-balance-sheet partnerships from which Enron managers had profited.

The matter is being investigated by the Securities and Exchange Commission.

Enron also reported an unexpected $618-million loss in the third quarter.

The energy market’s confidence in Enron‘s ability to meet its obligations has ebbed along with the company’s stock price, and trading partners have begun shying away from entering new long-term transactions with Enron, industry sources said.

Competitors Reliant Energy Inc., Aquila Inc. and El Paso Corp. all reported a pickup in business as companies attempt to reduce their exposure to Enron.

In addition, energy brokers on the New York Mercantile Exchange are demanding higher margin deposits from Enron, according to Platts, a private energy news service. Enron in recent days has been raising cash by turning over trading positions to other companies at a sizable discount, Platts said.

Banking sources told the Financial Times in London that Enron has called an emergency meeting of its lenders to persuade them to extend credit lines.

Enron last week won a commitment for a $1-billion credit line from J.P. Morgan Chase and Salomon Smith Barney, but other banks declined to join in. To get the financing, Enron had to pledge some natural gas pipeline assets.

Although there has been no crisis akin to a run on a bank, Enron cannot survive for long without a major infusion of capital, Todd A. Shipman, analyst for Standard & Poor’s, said Wednesday.

“There’s a difference between reducing exposure to Enron and not doing business or demanding cash upfront,” he said, but he added that the company’s trading partners have been “reexamining their attitude towards Enron every moment of every day.”

Energy analysts and executives said Wednesday that Dynegy Chairman and CEO Charles L. Watson could be taking a big risk buying into Enron.

“Chuck Watson is a brave guy but also a smart one,” one expert said. “I have to assume he knows what he’s getting with Enron.”

Would-be partners Watson and Lay have competed for prominence in Houston, arguing over stadiums and investing to bring the National Football League to the city.

Consumer activists wasted no time protesting a potential merger of Enron and Dynegy.

Dynegy, which owns California power plants in partnership with NRG Energy Inc. that are capable of generating 2,800 megawatts of electricity, was among the companies Gov. Gray Davis and other politicians have repeatedly slammed as “pirates” that charged the state too much for electricity during its recent energy crisis.

“The energy cartel already has done so much damage in California, and the only thing worse than that would be a more tightly controlled energy cartel,” said Doug Heller of the Foundation for Taxpayer & Consumer Rights in Santa Monica. “These are two lawless cowboys forming a single bandit.”

As board meetings continued Wednesday night in Houston, sources said a deal was probable at about $8 billion, or $10 to $11 an Enron share.

Despite Enron‘s serious troubles, its trading business remains potentially powerful. Even in the company’s duress, the trading operation has gone forward, accounting for more than 25% of all electric power and natural gas traded globally. Enron, which took in $147 billion in revenue in the first nine months of this year, processes transactions worth an estimated $2billion a day.

If Dynegy were to add the immense trading operations of Enron and prove able to hold the franchise together, it would become a major power in global energy tradingDynegy also has a trading operation, but mostly it trades for the benefit of its own electric power and natural gas holdings; partner ChevronTexaco, the recently merged oil giant, would gain a significant edge in energy trading over its competitors.

Dynegy is conservative, while Enron has been very aggressive in trading,” said Mark Gurley, senior vice president of Aquila.

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