Wouldn’t bigger make Dynegy better?

The battle for Dynegy’s future is getting more intense by the day.

Dynegy’s chief executive, Bruce Williamson, and the board are urging shareholders to accept a proposal to sell the independent power producer to the Blackstone Group for $4.7bn. They say they have tried for years to find a buyer for the company, which faces a bleak future given low and dropping US natural gas prices and a heavy debt load it has been selling assets for years to service. Blackstone has the deep pockets to take the company off the restructuring wheel and put it on stable ground.

On Thursday, two separate proxy research firms gave opposing recommendations to shareholders. Egan-Jones Ratings said the company’s financial position meant it would be risky for Dynegy to remain a standalone company. But Glass Lewis said it would oppose the deal because it was insufficient and based on too narrow an interpretation of the company’s finances. They are not the first to weigh in.

Carl Icahn, the activist investor, last month bought a 9.95 per cent stake in Dynegy, objecting that the proposed buy-out undervalued the shares. Seneca Capital, an activist fund, bought 9.3 per cent of Dynegy and is weighing whether to replace two board members. And Karl Miller, an energy asset manager and consultant, has separately offered himself as a new CEO for Dynegy.

The most up-do-date picture of Dynegy’s finances will emerge on Monday, when it reports its financial results. But from company disclosures already out there, it is clear that the company is in a bind. It did not declare bankruptcy, like most of its peers, when the sector went through the Enron-era crisis. So it has been struggling for years to reduce its debt. Nobody but Blackstone was interested in buying the debt-laden company. Mr Williamson knows – he met with some 16 companies before Blackstone agreed to buy the company and then another 40 during the “go shop” period after the deal was announced.

It is admirable that Mr Williamson has protected shareholder interests by keeping the company out of Chapter 11. But one can see how frustrating it must be for him to have spent the past eight years restructuring and shrinking debt only to be hit by depressed natural gas prices that make it harder to keep going and put future earnings at risk.

It certainly is possible that debt could be restructured once again to keep Dynegy as a standalone entity. But is that really the best way to go?

There are some 250 mid-size and large utilities and distribution companies across the US. Power demand is down. The economy has yet to fully recover. Regulations requiring ever cleaner operations are looming. And power prices are low – and might be headed even lower – given a natural gas boom. One can see why a struggling power producer might look for someone with deep pockets to help get through this rough patch.

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