Enron Faces Bankruptcy as Dynegy Abandons Purchase (Update10)
By Mark Lake
New York, Nov. 28 (Bloomberg) -- Dynegy Inc. abandoned a takeover of Enron Corp., leaving the country's largest energy trader facing bankruptcy.
Enron shares plunged 85 percent to below $1 on concern the company can't repay its $15 billion in debt. Dynegy withdrew after bankers failed to raise $1.5 billion Enron needed to operate until the acquisition was completed. Credit-rating companies lowered Enron's rating to junk.
``The reality is Enron's going bankrupt,'' said Michael Willingham, a risk manager at Itochu International Inc., a unit of a Japanese trading firm. ``Enron touted themselves as the king of risk management, but it doesn't look like they've managed their risk very well.''
Enron's sudden collapse -- $26 billion of market value evaporated in seven weeks -- deals a blow to Alliance Capital Management Holdings LLP and other big mutual funds, Wall Street lenders such as J.P. Morgan Chase & Co. and Citigroup Inc., and the company's 21,000 employees, many of whom were relying on Enron shares for their retirement.
Rescue Fails
Bankers led by J.P. Morgan Chase Vice Chairman James B. Lee tried for two weeks to raise the cash Enron needed. Investors including Saudi Prince Alwaleed Bin Talal, Blackstone Group LP and Carlyle Group Inc. turned them down because of concern Enron would default. That concern was heightened after Enron disclosed it had a $690 million payment due this week.
Enron shares tumbled $3.50 to 61 cents in trading of more than 345 million shares, the most ever for a U.S. stock. After the market closed, the stock was dropped from the Standard & Poor's 500 Index. The company's 6.4 percent bonds, which mature in 2006, were quoted as low as 20 cents on the dollar, down from 53 yesterday. At that price the bonds yield 57 percent.
Dynegy said it abandoned the takeover ``due to breaches by Enron of representations, warrants, and covenants.'' Dynegy Chief Executive Officer Chuck Watson said the company invoked terms of the buyout agreement that gave it the right to purchase Enron's Northern Natural Gas pipeline if the deal fell apart.
``Sometimes the best deals are the ones you do not do,'' said Watson, who two weeks earlier had sealed the acquisition over coffee and muffins in the kitchen of Enron CEO Ken Lay's Houston home. ``We felt we had no choice but to act to protect our shareholders' interest.''
Possible Challenge
Enron may go to court to keep Dynegy from walking away and claiming ownership of the pipeline, said a person familiar with the situation. Enron appointed a consultant, Raymond Troubh, to the board to lead a new litigation committee. Under terms of the merger agreement, Dynegy has to pay Enron $350 million for terminating the deal.
Dynegy received the right to the pipeline in exchange for an investment of $1.5 billion in Enron by ChevronTexaco Corp., which owns one-quarter of Dynegy. The unit operates 16,500 miles of natural-gas pipeline.
As the news of Dynegy's rejection flashed across computer screens on Enron's trading floor in Houston, some employees started to abandon their desks and leave the office, an Enron trader said. Several workers said they expect the company to begin firing workers tomorrow to prepare for bankruptcy. The company said it would halt all payments other than those required to continue trading operations.
``We will work to retain the employees necessary to the continuing operations of our trading and other core energy businesses,'' Lay said in a statement. Lay was a backer of George W. Bush's presidential campaign and said he had held discussions about a job in the administration at one point.
Pipeline Company
Enron's roots lay in a natural-gas pipeline company formed in the 1930s. The company was transformed in the late 1990s by then- President Jeffrey Skilling into the largest competitor in the business of trading energy, mainly natural gas and electric power. Under Skilling, the company sought to expand into Internet trading for products ranging from metals to weather derivatives. Skilling resigned in August.
Enron shares tripled in the two years ended December 2000, peaking at a market value of more than $70 billion, as the company promised a surge in revenue with energy-management contracts from companies such as International Business Machines Corp. and Starwood Hotels & Resorts Worldwide Inc.
Enron began to unravel in October after it said shareholder equity was reduced by $1.2 billion because it used stock to pay off debt of a partnership run by then-Chief Financial Officer Andrew Fastow. The announcement led to lawsuits and a probe by the Securities and Exchange Commission. The writedown also raised questions about how Enron accounted for debt and losses of similar affiliated partnerships. On Nov. 8, it restated earnings back to 1997, lowering them by $580 million.
Low on Cash
As its shares plunged, Enron faced a cash crunch because lenders and trading partners lost confidence the company would be able to pay bills. Citigroup and J.P. Morgan Chase offered to pony up $250 million each out of $2 billion the company sought. Trading partners such as Mirant Corp. demanded more collateral or restricted trading with Enron.
EnronOnline, Enron Corp.'s online trading system, stopped allowing trades and quit posting bids and offers for natural gas this morning, say traders who use the Web site. Enron said yesterday that EnronOnline handled about 60 percent of its trading business, or about $2.8 billion a day.
``We can log in, but there is nothing there, nothing to buy and nothing to sell,'' said Juha Laiho, an energy trader at Finland-based Fortum Oyj in Houston.
Lower Credit Ratings
S&P cut its rating on Enron to ``B-'' from ``BBB-'' and Moody's Investors Service lowered its rating to ``B2'' from ``Baa3.'' The downgrades worsen the company's cash squeeze because Enron's debt agreements require it to repay early $3.9 billion of obligations if its debt is lowered to junk.
``This is a disaster,'' said Jon Kyle Cartwright, a debt analyst at Raymond James & Associates. ``It is difficult, if not impossible, for anyone to do trades with Enron's trading operations in light of junk ratings across the board and Dynegy walking away from the deal.''
Companies that do business with Enron and rivals assessed their losses and the prospect of picking up business. Mirant, an electricity and energy trader, said its pretax exposure to Enron is about $50 million to $60 million. Sempra Energy, a San Diego- based company, said it was interested in buying some assets.
Outlook for Holders
The large debts make it unlikely shareholders will receive much should the company file for bankruptcy.
``This will be a traditional bankruptcy in which equity holders get nothing,'' said Edward Paik, who has 1.6 million Enron shares among $7 billion in assets he helps manage for Liberty Funds Group. ``This company doesn't have the safety net in terms of assets that other companies do.''
Enron's collapse will ripple through its hometown of Houston where the company paid $3.3 million to put its name on the stadium of the Houston Astros and is building a 40-story tower designed by Cesar Pelli & Associates, the first skyscraper to be built in the city in almost 15 years.
Some employees who have seen their 401(k) retirement savings dwindle already filed lawsuits against the company. At the end of 2000, Enron shares accounted for almost two-thirds of the retirement program, which the company sponsored.
``Enron made Houston a cool place to live for all these Wall Street types,'' said Lyndon Taylor, principal with Heidrick & Struggles in Houston, who left New York to work for Enron for six years. ``It was named America's Most Innovative Company for five years running. Is there another America's Most Innovative Company in Houston? Probably not.''
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