Hello Dynegy, bye bye Enron

THOUSANDS of years ago, the Greek philosopher Sophocles warned that hubris inevitably led to destruction. Had Sophocles lived now and worked as a Wall Street merger arbitrageur, he would have enjoyed the spectacular rise and even more spectacular fall of Enron, the Houston natural gas pipeline company that transformed itself into the world's leading trader in energy, natural gas and electricity.

A year ago, Enron commanded a market value of $67 billion and its CEO jet-settled with heads of state at places like Davos, the Elysee Palace and the oil capitals of the Middle East. However, after Enron's CEO ran a shadowy daisy chain of private partnerships, Enron was forced to write down a billion dollars of shareholder equity, restate it earnings, was the target of a SEC investigation and had its credit ratings slashed by Moodys to almost junk.

Enron shares, $84 last Christmas, collapsed to $7 or half its book value. As late as October 15, Enron traded at $38 a share on the NYSE. Next week, Enron will exist no more. Dynegy has made a bid for Enron that is going to lead to the most stunning Texan oil and gas takeover deal of the new millennium. Hubris on Wall Street or anywhere else in international finance usually ends in tears. Maxwell, BCCI, Borings, Peregrine, Drexel Burnham and now Enron.

Enron's price action since its $7 low on Thursday suggests the Dynegy bid is a done deal, though there is an outside chance another oil and gas consortium could make a white knight bid next week. A Wall Street M & A stock swap deal is a green light to short the predator, long the target. Not so here. This is no normal deal, Dynegy is no normal bidder and Enron is no normal target. Dynegy, one-third owned by the Seven Sister global oil colossus Chevron Texaco, is buying Enron at a fire sale price of a mere $8 billion plus assumption of its $14 billion debt. That equates to a $9.70-10 price for ENE. Will Enron sell? They have no confidence. investor confidence is gone. Their bankers at their throat as a cash crunch turns into a hemorrhage and their counter parties refuse to do business with them. Imagine, if, say, Citi or JP Morgan suddenly went belly up in the global currency or swap markets. Well, the same thing could happen if Enron disappeared in the futures market for natural gas, electricity or heating oil. So, Federal antitrust approval is a piece of cake for the DYN-ENE deal. Remember that George Bush and Dick Cheney are both ex-Texan oilmen and Dynegy and Enron CEOs are all old Houston buddies who bankrolled Junior's run for the White House. Unless a white knight bid appears, Erron is history next week. How can investors in the UAE make money from what could be Wall Street's most stunning energy takeover of 2001?

Take Dynegy, for instance. The fifth largest energy merchant in the US will become the world's leading trader of natural gas, electricity and power if it wins Enron, which I bet it will. This is no Mickey Mouse utility either.

Dynegy owns 1500 power plants and owns power transmission assets In US, Europe, Canada and Britain. It is an embryonic Enron, circa 1995. Its CEO, Chuck Watson who owns 12 million shares or 5 per cent of DNY is the father of the New York Merc's natural gas future markets. Thanks to its parent Dynegy markets the gas volume of Texaco and manages the liquid gas assets of Chevron. Its Internet brokerage business, when combined with Enron, will be the world's leading online commodity exchange.

In normal times, buying a giant line Enron would be dilutive big time money for Dynegy. But these are not normal times. Enron is going to be an earnings windfall for Dynegy, even if there are bombshells in its balance sheet or shareholder lawsuits on the busted partnerships that doomed ENE. Regulatory risk? Which Congressmen in his right mind would block a deal that would deny Joe and Jane America heating and electricity once winter begins and the boys are defending Western civilization in the skies above Kabul?

Dynegy could well do $3 to $3.5 EPS next year if it wins Enron. Yet9 It has historically traded at a multiple valution of 20-25. At 38, DYN is trading at a forward multiple of 11-13 at a time when energy merchant firms are trading at their lowest valuation multiple since 1994-95 relative to the SP-500. Yet Dynegy will do 25 per cent growth in profit almost double the index in even the rosiest of economic scenarios. It is going to also have a kicker in its telecom broadband business, is owed money by California utilities and Henry Hub natural gas prices are set to rise at least 20 per cent in 2002. Above all, Dynegy - Enron will become a Goliath in the global natural gas, power and electricity assets. I do not need to be Warren Buffet or George Soros to figure out that the world's Numero Uno energy merchant could well see multiple expansion. My call? Dynegy trades at 20 times its 2000 earnings if it wins Enron. That means, its shares are worth $60 at least. Thanks to Chevron Texaco's billions in capital and world class balance sheet, Dynegy is going to win the deal of the decade in the Oil Patch. It is buying Enron at distress prices. So, if your brokers did not show you how to make money on Enron on its way down, try to pick up Dynegy on the way up!

A new global natural gas and power trading colossus will be born on Wall Street next week. The June 35 Dynegy call options closed at 8 on Friday. I predict these will double to 16 by early 2002.

MATEIN KHALID
STRATEGIST, CAPITAL MARKETS & RESEARCH

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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