Market remains nervous about Enron/Dynegy deal

Investors and trading partners appear to be anxious about the prospects for Dynegy’s acquisition of troubled energy group Enron that was announced nine days ago. Enron’s share price is standing well below the value of Dynegy’s offer and competitors are taking steps to protect their own trading exposures to the Houston-based firm.

The Dynegy rescue package is worth $9.8bn but because of the complexities of the deal, is likely to take many months to complete.

The bid was well received by the market initially after Enron’s share price had plummeted and its rating fallen to a notch above investment grade. The loss of confidence followed revelations concerning off-balance sheet trading with companies in Enron’s Finance director had an interest.

Enron became subject to a SEC investigation and was forced to admit that prior year profits had been overstated. This enquiry further complicates and potentially delays the completion of the acquisition, which has given some investors the jitters.

David Fleischer, analyst with Goldman Sachs believes that the fears are overstated. “This deal will go through” he said. “From Dynegy’s perspective the deal looks very good”.

But other energy companies who have trading exposures to Enron are taking a more cautious approach and are reluctant to enter into long term deals with Enron at present. Enron’s president and chief operating officer Greg Whalley, said working with counterparties had been “difficult” in the previous week, speaking during a conference call last Wednesday.

Enron’s fall from the position as a market favourite has been spectacular. Although the company was renowned for the quality of its management and had transformed itself into the leading energy trader in the US market, analysts were always frustrated by the lack of disclosure available. The profit record of the company overshadowed the shortcoming but the trust that built up was shattered by the emergence of the irregularities and the way it was handled.

“The problem was not the losses which need not have brought the company down”, said Fleischer. “The company was sunk by the breach of trust that occurred”.

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