Blackstone tries to steal Dynegy

  • AUGUST 16, 2010, 4:45 P.M. ET
  • Blackstone Might Rewire Dynegy’s Balance Sheet


    It isn’t often a 62% premium offers reason for grumbling.

    Blackstone Group‘s takeover offer for Dynegy effectively gives it two-thirds of the company’s generation capacity plus cash for no money down. That is because NRG Energy has simultaneously agreed to buy about a third of Dynegy’s megawatts for $1.36 billion, or about $800 million more than the price tag for Dynegy’s equity.

    Why didn’t Dynegy sell the assets to NRG and keep the money itself? Probably because it did this a year ago for no discernible gain. In August 2009, Dynegy sold about a quarter of its capacity to LS Power to boost liquidity. That didn’t stop the stock dropping from about $10 then to less than $3 before Blackstone showed up.

    If shareholders are miffed, it is Dynegy’s bondholders that have real reason to worry. Should Blackstone decide to dividend the entire proceeds of the NRG deal back to itself, Dynegy will be left carrying its existing debt load on a smaller stream of profits. That would raise the company’s already high credit risk. But then Blackstone, sitting on a potential $800 million instant profit and with no other shareholders to protect, need not worry too much about that.

    Alternatively, Blackstone could use some of that profit to buy in some of those bonds. Doing so would reduce Dynegy’s debt burden and, possibly, its cash interest costs, potentially boosting Blackstone’s return when it sells the company down the road.

    This likely would only make sense, however, if Blackstone bought the bonds below even today’s market values of between 60 and 80 cents on the dollar. Shareholders might wish they got a higher premium. Bondholders may end up scrambling to limit their losses.

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