August 18, 2010, 8:40 AM
by Claire Poole
Tudor, Pickering, Holt & Co. Securities Inc. said in a report Monday that the probability is low, since Blackstone Group LP's (NYSE:BX) heavily structured $5 billion deal is dependent on NRG Energy Inc. picking up four plants, making it hard to duplicate. "We can't see anyone stepping up," the firm said.
Pritchard Capital Partners LLC says that another private buyer, paired with a utility or independent power generator, could come on the scene, despite the short 40-day go-shop period. Options traders also foresee a bidding war, with volume soaring Aug. 13 amid bets that Dynegy's shares could rise a further 12% or more to $5.10 by mid-December.
Standard & Poor's Equity Research utilities analyst Christopher Muir wrote in a note Aug. 13 that he doesn't expect interest from another independent power producer, either because they're not interested or because many companies are already involved in other deals -- Mirant Corp. (NYSE:MIR) is merging with RRI Energy Inc. (NYSE:RRI), and FirstEnergy Corp. (NYSE:FE) is hooking up with Allegheny Energy Inc. (NYSE:AYE), for example. "But we think other private equity firms might be interested," he noted.
Folks are also in disagreement about whether Dynegy is a steal or not. Blackstone agreed to pay $4.50 per share for Dynegy, versus its recent trading price of $2.76 -- a sweet 62% premium for a struggling company with $4.6 billion in debt on its books. That translates into a rich 11 to 12 times Ebitda, versus lower multiples for much healthier power generators such as NRG (4 to 5 times) and Calpine Corp. ([NYSE:CPN] 8 to 9 times).
Still, Dynegy was trading at more than Blackstone's offering price just a few months ago, and Pritchard estimates that the private equity firm is getting the company at 35% below Dynegy's breakup value. Several law firms have announced they've launched investigations into potential claims against Dynegy on behalf of shareholders.
"The deal is so rich for Blackstone that I do believe that the Dynegy board will be under tremendous pressure to produce a higher bid or demonstrate that they have really worked the 40-day go-shop provision," says Karl Miller, who has worked in the industry and is now an independent consultant. "It appears to me that they are basically giving the company away, just to get a sale off, which they have been trying to do for years."
Whether there's a new bidder or not, analysts expect the Dynegy transaction to spur more deals in the power and utilities sector, which saw deal volume jump 38% and deal value increase 14% in the second quarter, according to a PricewaterhouseCoopers LLP report that will be released Wednesday. Says John McConomy, power and utilities transaction leader at PricewaterhouseCoopers: "It [the Dynegy deal] bodes well for continuing consolidation in the industry."
There are already signs that the trend will continue. Energy Capital Partners -- run by former Goldman, Sachs & Co. (NYSE:GS) utility banker Doug Kimmelman -- announced Tuesday it has raised a $4.3 billion fund for investment in the sector. And there are rumblings that the Mirant-RRI Energy combination could attract takeover interest once it closes by year's end.
Miller says there are 10 to 12 private equity firms flush with cash that are interested in acquiring midcap gas and electric utilities and large power generation portfolios and that AES Corp. (NYSE:AES) and Duke Energy Corp. (NYSE:DUK) both have cash and are ambitious. As for targets, he says NRG is a "sitting duck, and the only thing holding buyers back has been the ability to lever their acquisition plans with sufficient access to debt."
Disclosure: Long Energy Companies