UPDATE 5-Icahn threatens to upset Dynegy deal

* Icahn picks up 9.95 pct stake, becomes top stakeholder

* Says Dynegy shares undervalued

* May seek talks with Dynegy to discuss Blackstone offer

* Shares up 2.5 pct
(Rewrites first paragraph, adds analyst comment, updates share
price)

By Michael Erman and Megan Davies

NEW YORK, Oct 12 (BestGrowthStock) – Billionaire investor Carl
Icahn revealed on Tuesday that he built a 10 percent stake in
Dynegy Inc (DYN.N: ) and said the Blackstone Group’s (BX.N: ) $4.7
billion buyout of the struggling power company was too low,
threatening the deal’s chances of succeeding in its current
form.

Icahn, who has agitated for change at companies including
Yahoo Inc (YHOO.O: ) and Genzyme Corp (GENZ.O: ), said in a filing
with U.S. regulators that he does not believe “that the
consideration agreed to in the proposed merger is adequate.” He
paid on average of $4.79 a share for his Dynegy stake — about
6.5 percent higher than Blackstone’s $4.50-a-share deal.

New York-based private equity firm Blackstone announced its
$4.7 billion to buy Dynegy on Aug. 13, offering a 62 percent
premium over its closing price the previous day. Shareholders
are scheduled to vote on the deal in mid-November.

Dynegy held a “go-shop” period — where rival bidders could
have expressed interest — that ended on Sept. 22.

However, despite no other bid materializing, the company’s
shares have been trading higher than the offer price,
indicating that some expect Blackstone to raise its bid.

“It remains to be seen if Blackstone chooses to appease the
shareholders by raising their bid or if they choose to take the
chance of a rejection of the proposed $4.50 outcome,” Knight
Capital analyst Terran Miller said in a research note.

“If the merger is ultimately rejected by the shareholders
then Dynegy will need to find another source of liquidity to
fund the anticipated negative free cash flow over the next
several years.”

Blackstone itself has indicated there was no higher offer
coming and cautioned that Dynegy’s future as a public company
looked bleak without a deal. [ID: nN06280654]

The power company also said in a recent letter to
shareholders that conditions have deteriorated since
Blackstone’s offer, citing low and declining commodity prices,
continued economic weakness and a challenging financial
position.

Dynegy said then that “the risks of continuing to operate
as a stand-alone public company significantly outweigh the
potential upside of doing so,” forecasting $1.1 billion of
negative cash flow through 2014.

Dynegy’s shares closed up about 2.5 percent at $4.87 on
Tuesday.

SHARES ‘UNDERVALUED’

Icahn bought 12 million Dynegy shares for $57.5 million,
saying they were undervalued. The filing also said that Icahn
might pursue conversations with Dynegy to discuss the deal.

The previous top shareholder in Dynegy, with a 9.3 percent
stake, was hedge fund manager Seneca Capital, which has
indicated it could oppose the Blackstone bid, according to a
Wall Street Journal article.

In a recent filing Seneca said it reserved the right to
“implement plans or proposals with respect to the issuer
(Dynegy) as a means of enhancing shareholder value, whether
alone or with third parties.”

Blackstone’s deal for Dynegy was unusually structured. It
includes a $1.36 billion deal signed at the same time to sell
four of Dynegy’s natural gas-fired power plants to NRG Energy
Inc (NRG.N: ).

Most of the price of the deal is made up of debt, with $543
million equity.

Shareholder approval requires just over 50 percent in favor
to go through and a vote is scheduled for Nov. 17.

Icahn is also involved with Hollywood studios Lions Gate
Entertainment (LGF.N: ) and Metro-Goldwyn-Mayer, and has
supported a proposal by Lions Gate to combine the two studios.
[ID:nSGE69B0GS]
(Additional reporting by Krishna N. Das in Bangalore, Editing
by Ian Geoghegan, Maureen Bavdek and Matthew Lewis)

UPDATE 5-Icahn threatens to upset Dynegy deal