DEALTALK-Blackstone’s Dynegy scoop unlikely copied

* Dynegy’s lack of change of control provision unusual

* Rival firms structured differently

* New round of takeouts unlikely

(For more Reuters DEALTALKs, click [DEALTALK/])

By Megan Davies and Michael Erman

NEW YORK, Aug 13 (BestGrowthStock) – Blackstone Group LP’s (BX.N: )
deal to buy Dynegy Inc (DYN.N: ) is an unusually structured
buyout that would give it control of the power company without
having to refinance or invest much cash and similar takeovers
of independent power companies are unlikely to follow.

A key factor in the deal is that a substantial amount of
Dynegy’s debt is bonds that do not have change of control
provisions, a source familiar with the situation said.

“This is what you call a prepackaged leveraged buyout,”
said an M&A lawyer who spoke on condition of anonymity.
“(Blackstone) gets to do a deal and they don’t have to go and
find leverage — and you probably couldn’t get leverage at
these levels and at these terms in this market.”

Crucially, Dynegy is the only independent power producer
without change of control covenants in a majority of its debt,
said CreditSights analyst Andy DeVries wrote in a research
note.

The lack of a change of control provision means that
Blackstone does not have to refinance Dynegy’s debt.

In a typical leveraged buyout, the private equity buyers
refinance the debt and the buyers inject at least 30 percent
equity. Blackstone’s equity stake in the deal is low by
historic standards.

The fact other power firms are not structured with change
of control covenants makes the possibility of more deals less
likely, said an analyst at CreditSights.

“We view the refinancing requirements of these covenants as
a significant obstacle to additional corporate level M&A,”
CreditSights said.

Other independent power companies include RRI Energy Inc
(RRI.N: ), Mirant Corp (MIR.N: ) and Calpine Corp (CPN.N: ). All
those companies’ shares were higher on Friday.

Blackstone’s deal values Dynegy’s shares at $4.50 each, or
$543 million in cash for the equity. But including debt, the
deal is valued at $4.7 billion.

The private equity firm also clinched a $1.3 billion deal
to sell some of the company’s best assets to NRG Energy Inc
(NRG.N: ) in the latest shake-up in the electricity industry.

CreditSights said because of these factors, not only is
Blackstone not required to put any money into the deal, they
could actually get around $800 million back once the deals
close.

But a source familiar with the matter said that, after NRG
acquires the Dynegy assets, that money stays on Dynegy’s
balance sheet rather than going to Blackstone.

CreditSights’ DeVries wrote that he thought it was unlikely
Blackstone would add debt to Dynegy.

“We think it is more likely Blackstone rides out the
investment at least until environmental spending starts
declining …,” he wrote.

Independent power producers, who sell electricity at
competitive rates into the wholesale market, have struggled as
weak demand and lower natural gas prices have resulted in lower
electricity rates.

High natural gas prices result in high electricity prices
and wide margins for companies that reap a significant portion
of their earnings from coal-fired power plants, such as Dynegy.
But natural gas prices have settled at around $4 per million
British thermal units in 2010, down from recent highs of more
than $13 per mmBtu in 2008.

Still, if gas prices rise, Blackstone is seen making a huge
profit.

“This is a highly leveraged company with a bunch of
leverage in place and, if things turn around and gas prices go
up, Blackstone makes a killing,” said the lawyer.

GO SHOP

The deal includes a ‘go-shop’ provision for 40 days when
Dynegy can solicit other offers. However, there are no obvious
alternative bidders, said analysts at UBS bank.

“We believe shareholders will gladly accept the bid and do
not believe shares should trade at a premium given the lack of
obvious alternative bidders,” UBS said in a research note.

Dynegy has long sought to merge with a peer, and has long
been rumored to be a takeout target, but weak market conditions
made completing a deal difficult.

Private equity firm LS Power picked up a 40 percent stake
in Dynegy and started a power development company with the
company in 2007. The firm had the opportunity under its deal to
buy the rest of Dynegy, but it walked away from the
collaboration and returned most of its stock last year
instead.

“The company’s been on the market for the last 8 years or
so. They’ve already been shopped (around) for a very long
time,” said one investment banker. “I’d be very surprised if
anyone else comes in and sees this as a hidden gem.”

DEALTALK-Blackstone’s Dynegy scoop unlikely copied