Shares of Enron Corp., one of the largest energy trading firms in the world, collapsed Wednesday, after its potential savior Dynegy Inc. pulled out of its proposed $8.4 billion acquisition of the financially ailing Enron.
Before trading in its shares was halted midday, Enron was trading at $1.20, after losing over 70 percent of their remaining value on the day. Shares of Dynegy were also down about 10 percent.
According to Dynegy, a smaller rival of Enron's, it aborted its buyout plans because of "Enron's breaches of representations, warranties, covenants and agreements in the merger agreement, including the material adverse change provision."
Chuck Watson, Dynegy's chairman and chief executive officer, said despite the decision to drop its planned acquisition of Enron, his company remains strong.
"While it is regrettable to see a leading industry player in difficulties, this does not reflect a failure of the energy merchant business," Watson said in a statement. "Dynegy's customer-based, asset-backed energy delivery network has been the driver of our 45 percent compounded annual growth rate for the past 16 years and will continue to provide us with earnings sustainability and future growth"
Dynegy said, however, that it would exercise its right to purchase Enron's Northern Natural Gas pipeline, to which Dynegy received an option after it and ChevronTexaco Inc., which holds a stake in Dynegy, earlier pumped $1.5 billion into a troubled Enron.
With the termination of the larger deal, industry experts said that the inevitable next step for Enron was to file bankruptcy.
Enron has burned through $2.5 billion from Sept. 30 to mid-November -- including $800 million of debt paid off -- with the company's current cash balance of $1.2 billion inadequate to meet remaining fourth quarter debt repayment obligations of $2.8 billion.
Earlier this month, Enron warned in a filing with the SEC that the company could be forced to pay $690 million by debt by this week because of its steadily decreasing credit ratings.
Prior to the collapse of its merger agreement with Dynegy, bankers led by James Lee, vice chairman of J.P. Morgan Chase, had unsuccessfully tried for several weeks to raise sufficient cash to keep Enron afloat.
According to a report Wednesday in the Wall Street Journal, J.P. Morgan Chase and Citigroup, advisors to the transaction, had invested $250 million each in equity in the transaction, and also each had loans outstanding to Enron of between $700 to $800 million. The transaction had represented yet another attempt by the two commercial banks to establish leadership positions in the merger and acquisition business, traditionally the preserve of Wall Street investment banks, through leveraging their balance sheets.
Without the necessary $1.5 billion that Enron needed to operate pending any deal, Standard & Poor's cut the company's credit rating to junk.
Dynegy had written a clause into its merger agreement with Enron that allowed it to walk away from the deal if Enron's problems turn out to be worse than previously disclosed.
The unhappy outcome of the Enron/Dynergy merger discussions had been predicted by my colleague Martin Hutchinson in his piece "Two plus two equals sayonara?" of Nov. 8.
