Dynegy Just Got Pricier - Analyst Blog

Houston-based merchant generator, Dynegy Inc. (DYN) just got dearer for Private Equity firm The Blackstone Group (BX), its suitor. Faced with a lukewarm response from shareholders for the deal, Blackstone on Tuesday raised its bid for Dynegy by 11% to $5 per share from the earlier bid of $4.50.

Blackstone was forced to raise the bar after two major holders of Dynegy, billionaire investor Carl Icahn and Seneca Capital went public with their sentiments about the deal being undervalued. With the new bid on Tuesday from Blackstone, Dynegy has seen its stock price soar. It has spiked 8.4% or 39 cents to close at $5.02 on Tuesday.

However, the deal is far from over on the Dynegy front with the $5 per share bid still being seen as undervalued by Carl Icahn and Seneca Capital. This has stalled the smooth ride of The Blackstone Group since August 2010, when it first announced that it intended to acquire Dynegy. Post-acquisition, Blackstone plans to sell a portion of Dynegy's generation assets to NRG Energy Inc. (NRG), which is proactively looking at increasing its presence in California.

The deal was touted as win-win for both parties, with Dynegy's shareholders hit hard by mark-to-market losses from forward power sales, enjoying near-term valuation upside.

On the other hand, Blackstone was eyeing Dynegy's generation assets -- a portion of which would be sold to NRG Energy, while the rest would be margin-accretive once the Midwest power market improves.

Dynegy's wholesale electric power -- supplied to utilities, cooperatives, municipalities and other energy companies in the Midwest, the Northeast and the West Coast -- provides a relatively stable and growing earnings stream.

Geographic disparity in the target markets of Dynegy has helped shape a portfolio that is well-positioned for capitalizing on arbitrage opportunities arising from regional differences in power prices and weather-driven demand.

Dynegy's low-cost, well-operated power generation portfolio, which spreads across six U.S. states, is a diverse mix of coal, oil and natural gas. Diversified generation assets give the company's cost structure a natural hedge against commodity price volatility.

Dynegy's prudent financial management has helped minimize generation dispatch costs. To cater to its coal-based generation assets, the company has contracted substantially all its coal requirements until 2012. Also, in a smart move, it has inserted a non-fuel price escalator until 2013 for its coal transportation contract through rail.

In the near-term, the Zacks #3 Rank (Hold) Dynegy stock is expected to digest losses due to weak forward natural gas prices and tepid forward Midwest power prices. The company expects a net loss in the range of $180 – 200 million in fiscal 2010.

 
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