Dynegy Rejects Blackstone Deal - Analyst Blog

Asset management and financial services company The Blackstone Group's (BX) dream to acquire Houston-based merchant generator, Dynegy Inc. (DYN) went bust with the latter rejecting the proposal at a special shareholder meeting for the purpose.

Earlier faced with a lukewarm response from shareholders for the merger deal, Blackstone offered a final bid price of $5 per share for Dynegy from the earlier bid of $4.50. As a result, the merger agreement has been terminated. The deal was doomed from the start with two major holders of Dynegy, billionaire investor Carl Icahn and Seneca Capital going public with their sentiments about the deal being undervalued.

The deal was touted as a win-win for both parties, with Dynegy's shareholders hit hard by mark-to-market losses from forward power sales, enjoyed a brief period of near-term valuation upside. On the other hand, Blackstone was eyeing Dynegy's generation assets -- a portion of which would have been sold to NRG Energy Inc. (NRG) who were looking to augmenting their presence in California.

Post the merger debacle, Dynegy will shortly commence soliciting alternative proposals from alternative parties along with reviewing its standalone restructuring alternatives. The company supplies wholesale electric power to utilities, cooperatives, municipalities and other energy companies in the Midwest, the Northeast and the West Coast -- providing 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 by rail.

In the near-term, the Zacks #4 Rank (Sell) 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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