Dynegy looks beyond failed Blackstone bid

By Michael Erman

NEW YORK (BestGrowthStock) – Private equity firm Blackstone Group (BX.N: ) lost its $602 million bid to buy power producer Dynegy Inc (DYN.N: ) after failing to win shareholder support, likely forcing the debt-heavy company to find another buyer, sell assets or restructure.

The proposal “has not received the requisite vote,” Dynegy Chief Executive Bruce Williamson said on Tuesday when the company reconvened its shareholder meeting from last week.

Williamson did not indicate how Blackstone’s amended $5-a-share offer fared in the shareholder vote and did not comment beyond a prepared script at the brief meeting.

Blackstone met strong resistance from Dynegy’s two largest shareholders — billionaire Carl Icahn and hedge fund Seneca Capital — and the companies said they planned to officially end the deal later on Tuesday because they could not get approval from investors.

Earlier, Dynegy said its board would initiate an open strategic alternatives process to maximize stockholder value.

That will include launching an auction “as quickly as possible,” and hiring a restructuring adviser, said Dynegy spokesman David Byford.

Dynegy said it would contact both Icahn and Seneca. Icahn has said he might bid for Dynegy if the Blackstone bid failed.

Blackstone reiterated in a statement on Tuesday that its $5-a-share bid was its best and final offer, and wished Dynegy the best as it looks for a new buyer. The private equity firm is set to receive a $16.3 million break-up fee if Dynegy reaches a new deal at $4.50 a share or higher within 18 months.

Dynegy shares fell 2.7 percent to close at $5.00, after dipping below the Blackstone bid following the announcement. Blackstone ended down 2.4 percent at $12.93.


Dynegy has been weighed down by a heavy debt load of more than $4 billion. A buyer would have to deal with the company’s debt, meaning any sale would be significantly more costly than the straight equity value.

Seneca and Icahn had fiercely opposed the Blackstone proposal because they thought it was too low, even after the private equity firm raised its bid by 11 percent a week ago to try to muster support for the deal.

Dynegy said a special committee of its independent board members, chaired by lead independent director Patricia Hammick, will oversee what it calls its strategic alternatives process.

The company has said it had put itself up for sale two years before reaching the Blackstone deal and had run a “go-shop” process where competing bids could be entered afterward. No bidder emerged during those processes.

A source familiar with the matter said Dynegy’s search for a new buyer — whether one is found or not — should be completed by the end of January.

The source said the most likely bidders for Dynegy would be private equity firms that compete with Blackstone, which could look to create value by buying the company and restructuring its debt.

Pritchard Capital Partners analyst Charles Fishman said he believes that more value can be squeezed out of Dynegy than the Blackstone bid would have delivered. He said he believes the company’s break-apart value is around $9 a share.

“Certainly it’s a lousy time to be selling those plants, but if you’re just patient, some of these plants are very, very good plants,” Fishman said. “But I think in another year or two, power prices recover and we see a recovery in natural gas prices. At that point I think you can get to what the Senecas and the Icahns think the value is.”

Dynegy, which once sought to challenge Enron Corp in the power trading business and even sought to buy the disgraced energy company shortly before its demise, has focused in the last several years on operating its power plants in the Midwest, Northeast and West.


Dynegy sells power to the wholesale markets and operates more than 12,000 megawatts of gas- and coal-fired power plants.

The company is very sensitive to natural gas prices, which are correlated with wholesale electricity prices, and has suffered as oversupply has driven down the value of the fuel.

It has argued that “the risks of continuing to operate as a stand-alone public company significantly outweigh the potential upside of doing so,” forecasting $1.6 billion of negative cash flow between 2011 and 2015.

But Seneca has put forward a much rosier view of Dynegy’s prospects, saying power prices are improving and the company is worth more than $6 a share.

Dynegy said it would engage with Seneca Capital about appointing an independent candidate to its board, which currently has six members, five of whom are independent.

Seneca has already nominated two candidates to Dynegy’s board and proposed the removal of two current directors, including CEO Williamson.

Dynegy also adopted a shareholders rights plan.

Blackstone’s bid was structured in an unusual way. It included a $1.36 billion deal by Blackstone to sell four of Dynegy’s natural gas-fired power plants to NRG Energy Inc. (NRG.N: ) That deal was contingent on Blackstone completing the Dynegy bid.

NRG will look to lower the price of its bid for the plants before agreeing to any new deal for those assets, CEO David Crane has said.

Goldman, Sachs & Co (GS.N: ) and Greenhill & Co LLC will be financial advisers for the open strategic alternatives process. Sullivan & Cromwell LLP is legal counsel.

(Additional reporting by Elinor Comlay and Megan Davies in New York, Adveith Nair in Bangalore and Anna Driver and Eileen O’Grady in Houston; Editing by Maureen Bavdek, Tim Dobbyn, Gary Hill)

Dynegy looks beyond failed Blackstone bid