Troubled US energy group Enron has bowed to fast developing financial pressure and succumbed to an all-stock takeover bid of around $10 billion by smaller rival Dynegy. But fears persist that Dynegy may abandon the rescue bid through a 'material adverse change' clause; Chevron-Texaco, 26 per cent owner of Dynegy and backers of the bid to the tune of $1.5 bn, may withdraw support if the risk of shareholder litigation at Enron becomes too great. Business analysts are currently rating the deal's chances of success at 65-75 per cent.
As a result of the takeover Enron is likely to be cut down to core businesses in gas pipelines and electricity trading, a reversal of the strategy of expansion that only a year ago made it the darling of American investors and a major playmaker in the energy trading market. Dynegy will also take on Enron's $13 billion of debt, and will be aided by the selling of peripheral assets, currently logged at $5 billion on the company's balance sheet. Utilicorp-owned energy trader Aquila is said to be looking at Enron assets, including peaking plants in the US and Teesside power station in the UK.
The takeover comes after a sequence of revelations about the company involving off-balance sheet activities, asset write-offs and long term inventive accounting - understated indebtedness and inflated profit figures - resulting in the revision of Enron annual accounts going back to 1997. A share price that started the most recent 12 month period at $84, and which had been as high as $90, slumped rapidly to $7 and, despite attempts to bolster confidence and maintain credit ratings by establishing new lines of credit amounting to $1.2 billion, showed no sign of resisting a further slide into a 'junk', or non-tradeable, position.
The company had slipped to barely above junk status in the various credit ratings and its quoted valuation had dropped dramatically below its estimated asset value per share figure of around $24, making it a natural target for takeover. Despite rumours suggesting that Royal Dutch Shell were considering an offer, nothing concrete emerged until the sudden entry of Dynegy.
Shares in Dynegy rose 14 per cent as soon as the bid became public knowledge, despite concerns about possible time bombs in the Enron balance sheet in connection with indebtedness of off-balance sheet entities that triggered a noticeable amount of exposure-limiting measures by Enron's trading partners. Dynegy has protected itself against such eventualities with a number of material adverse change clauses that cover unexpected losses from off-balance sheet transactions, balance sheet impairment and the outcome of the current Securities and Exchange Commission investigation.
Meanwhile Enron's Indian venture Dabhol Power Company may face losses in the order of $1 billion unless a compensation deal based on state credit guarantees can be worked out with the Indian government or the company can successfully carry out its threat of legal action over the breakdown of trading with Maharashtra state power company.
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