Dynegy Inc. and Enron Corp. executives Monday said Enron’s immediate liquidity worries are over with the announcement of Dynegy’s plans to buy Enron for $24 billion, including debt.
Investors were not waiting to see how traders and marketers at other companies reacted to the promise of more liquidity and assurances from Enron. They bid up Dynegy’s stock by 14% to $44.31 from Friday’s close of $38.76. Enron’s stock closed up 7.1% to $9.24/share, up 61¢.
The proposed purchase comes with an immediate infusion of $1.5 billion equity capital for Enron. ChevronTexaco Corp. is increasing its ownership of Dynegy’s preferred convertible shares to fund the $1.5 billion equity infusion into Enron. ChevronTexaco already owns a 26.5% stake in Dynegy.
“Enron’s liquidity needs will be met to conduct business,” said Rob Doty, Dynegy chief financial officer, in a conference call. “All these fears are put to rest.” In addition to the $1.5 billion cash advance from Dynegy, Enron has $750 million from a bank credit line, and $1 billion cash on hand, said Greg Whalley, Enron’s chief operating officer.
Enron Chairman Ken Lay said Enron needed to “stabilize the ship and get liquid” which was the fundamental reason to seek a merger.
“This deal shores things up pretty good and adds strength,” said Michael Heim, analyst with A.G. Edwards.
Whether the proposed merger and additional equity will be enough to reassure traders to continue business as usual isn’t clear. “This morning’s activity looks good,” said Jeff McMahon, chief financial officer of Enron. “We will know just how good by Wednesday’s conference call.”
Liquidity concerns drove Lay to seek a merger partner in the first place. The company began unraveling last month after $1 billion write-offs and losses were announced in the third quarter. Other revelations that upset the financial community were multiple off-balance sheet transactions — some headed by Enron executives — that were linked to Enron’s equity and could impact the balance sheet.
They are now the subject of a Securities and Exchange Commission investigation. Enron has said it has done nothing wrong and is cooperating with the SEC. The Houston compaany recently appointed a special committee to handle communications with the agency and named the dean of the University of Texas law school to its board.
Last week Enron restated $600 million in earnings over 4 years, further undermining the company’s credibility with investors. Meanwhile, the ratings agencies downgraded Enron to just a notch or two above junk bond status. The negative perception spread to the commercial paper market where Enron began to have trouble turning that paper over.