Icahn to Acquire Dynegy for $5.50/Share

 |  Includes: DYN, IEP
by: Zacks Investment Research

Icahn Enterprises L.P. (NASDAQ:IEP) announced that it will acquire Houston-based merchant generator, Dynegy Inc. (NYSE:DYN) for $5.50 per share in cash, or approximately $665 million.

Under the terms of the agreement, Dynegy stockholders will receive $5.50 in cash for each outstanding share of Dynegy common stock they own, which is $0.50 per share and represents a 10% premium to Dynegy’s average closing stock price over the last 30 trading days. Icahn Enterprises already owns an approximately 9.9% stake in Dynegy.

Earlier, faced with a lukewarm response from shareholders, Dynegy rejected The Blackstone Group’s (NYSE:BX) acquisition offer. Post the merger debacle, Dynegy commenced soliciting proposals from other parties along with reviewing its standalone restructuring alternatives. However, the company despite the Icahn Enterprises offer is still soliciting alternative bids.

Dynegy 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 #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.