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Enron, Dynegy hammer away at new merger deal

C Bryson Hull and Arindam Nag

Energy trader Dynegy Inc. and floundering rival Enron Corp. hammered away at new terms for their proposed merger late Tuesday, and sources said talks included a buyout offer half the original price and fervent efforts to secure financing to stave off a credit downgrade.

The sources familiar with the negotiations said investment banks J.P. Morgan and Citigroup, who are advisors and have already loaned Enron a total of $1 billion, may have to step up with a combined $500 million to help save the deal.

This follows several rebuffs of Enron by prominent private equity firms, although a source said the Houston company was entertaining an offer of $1 billion from outside investors.

Dynegy had planned to buy its Houston rival for $9 billion in stock and is currently in a "due diligence" examination of Enron's complex financial records that began before the Thanksgiving holiday last Thursday.

The first buyout offer, finalized Nov. 9, would have had Dynegy paying about $10.41 for each share of Enron, but Enron's shares have since cratered to near $4, stoking investor fears the merger will not go through.

It is abundantly clear that the deal will be changed if it is to proceed. Sources close to the negotiations said the stock exchange ratio is likely to fall into the range of 0.12 to 0.15 Dynegy shares for each Enron share, about half of the originally proposed valuation of 0.2685 to 1.

Enron had tentatively accepted the lower end of that range, but a source cautioned that the talks were still very active and the terms very fluid.

Also on the table were negotiations to extend maturation of Enron's debt past the close of the merger, expected in the third quarter of 2002, as another move against a credit cut.

Outside offer entertained

As for the outside offer of $1 billion, a source said the investment is designed to shore up Enron's balance sheet and keep rating agencies from junking its credit. A credit downgrade would cause some $3.9 billion in obligations to become due immediately.

"It's all about getting money to protect assets and intellectual property," the source told Reuters.

An announcement could come as early as Wednesday, but it could take longer, the source said.

The source declined to identify the parties, and would neither confirm or deny that Goldman Sachs was among them. Sources close to the investment bank have told Reuters recently that Goldman is looking at ways to be part of Enron's power trading business.

Dynegy spokesman John Sousa declined to comment on what he termed speculation about parties to the deal.

Enron's shares bounced slightly on Tuesday after Dynegy confirmed the restructuring talks. Shares closed up 13 cents at $4.14 on the New York Stock Exchange. Dynegy's shares gained 4.2 percent or $1.64 to $40.89 on the NYSE.

Another set of clouds darkening Enron's sky is the fact that its pursuit of private equity financing has found few takers among the more prominent private equity firms.

Three New York-based buyout firms, Blackstone Group, Clayton Dubilier & Rice and Warburg Pincus LLC have all passed on Enron, according to people familiar with Enron's efforts.

And Washington, D.C.-based Carlyle Group, another major private equity firm, is also not interested in Enron, Carlyle spokesman Chris Ullman said.

Some private equity executives who have looked at Enron say too much remains unclear about Enron's financial condition to commit funds in the near future.

One certainty is that layoffs are in Enron's future. Three sources confirmed to Reuters that Enron's equity trading unit is being closed and that the roughly 60 employees there are being laid off. An Enron spokesman would not comment on the cuts.

Those layoffs, part of broader job cuts expected as part of the Dynegy buyout, point to an acute problem for Enron -- the loss of volume in its trading franchise, the crown jewel most coveted by Dynegy. Enron's trading partners have been cutting back transactions with North America's largest energy trader because of credit concerns.

"This business is hugely dependent on volumes and volume growth. It is the principal reason that Dynegy is making the deal. If it's worth a lot less, then Enron is worth less. It's vital to stop the bleeding in its core trading and marketing business," said Commerzbank analyst Andre Meade.

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