Dynegy to buy once-mighty Enron

The merger capped a desperate bid by the nation's largest energy trader to salvage what it could of a business empire engulfed in financial crisis since disclosures last month of questionable business deals now under investigation by the U.S. Securities and Exchange Commission.

The buyout calls for Dynegy to swap 0.2685 of its stock for each Enron share, valuing the latter at $10.41 each, well down from highs above $80 earlier this year.

ChevronTexaco Corp. , owner of a 27 percent stake in Dynegy, will chip in $2.5 billion in new equity in Dynegy to back the deal, the companies said.

Enron, with $100 billion in revenues and $1 billion in profits last year, is fifth on Fortune 500's list of largest U.S. companies. Dynegy, 54th on the Fortune list, had $29 billion in revenues and $500 million in earnings.

If it passes muster with shareholders and regulators, the deal will make Dynegy an energy behemoth with annual revenues of $200 billion and $90 billion in assets, including 22,000 megawatts of electricity generating capacity and 25,000 miles of natural gas pipelines.

With Enron's online trading operations in hand, it will dominate the energy markets in the way that Enron has since the markets were deregulated in the mid-1990s. Dynegy said the deal would immediately add nearly $1 per share to earnings.

"It is a great deal for Dynegy and under the circumstances as a good of a deal as Enron could get," said UBS Warburg analyst Ron Barone.

The circumstances for Enron have deteriorated rapidly since mid-October disclosures about off-the-balance-sheet deals with partnerships run by former Chief Financial Officer Andrew Fastow, who the company said pocketed $30 million in the process.

The transactions contributed to a $1 billion third-quarter charge and $1.2 billion reduction in shareholders' equity that angered Wall Street and undermined confidence in Enron, causing a run on its coffers as trading partners in natural gas and electricity became reluctant to extend credit.

Its stock went into freefall, its credit ratings were slashed to near junk levels and it went begging for cash to back the trading operations that provided 90 percent of revenues. On Thursday, Enron had to restate earnings, cutting a total of $591 million from its net income going back to 1997.

With cash running out and pressure building for it to do something, Enron entered into talks with Dynegy.

Dynegy chairman and chief executive Chuck Watson said the company took a close look at Enron to make sure there were no surprises in its labyrinthine books.

"We looked under the hood and guess what? It's just as strong as we thought it was," he told reporters.

For Enron chairman and chief executive Ken Lay, it was a bitter experience giving up on the company he helped build from a mid-level natural gas pipeline into a corporate powerhouse.

He admitted he had hoped Enron could survive on its own, but said the company could not overcome the negative news that came out on an almost a daily basis.

"It has been a fairly consistent barrage of really negative articles and it's been very tough to beat those back," said Lay, who will not be a part of Dynegy's management team.

Analysts said Enron should blame itself, not bad publicity for its demise. They said the company was not forthcoming about the off-the-balance-sheet transactions, which some experts say are companies' way of hiding information from investors.

"Off-balance-sheet financing is a nice, gentlemanly label given to misrepresentation," said Yale University accounting professor Shyam Sunder.

Enron's demise could have far-reaching repercussions because it adds to doubts raised by last summer's California electricity crisis about the wisdom of deregulating the U.S. power industry, analysts said.

The company has been among the most aggressive corporate advocates of a competitive power market and now lies in tatters, which sends a troubling signal about the security of power supplies, they said.

So far 23 states and the District of Columbia have moved to deregulate their retail power markets, but a third of those have delayed it after California electricity prices soared and the state's largest public utility went bankrupt.

"Here is the big dog facing a very difficult time. If the big guy is doing this, is anybody safe or am I just better off taking service from my boring but reliable utility?" said Gerald Keenan, lead energy strategy partner at PwC Consulting, part of PricewaterhouseCoopers.