Private equity firm Blackstone Group Friday struck a deal to buy power producer Dynegy Inc. for $543 million in cash and sell some of the company’s best assets to NRG Energy in the latest shake-up in the electric industry.
The deal values Dynegy at $4.7 billion including debt, which would make it one of the biggest buyouts of a power company since Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs bought TXU for $32 billion in 2007.Dynegy, like other power producers, has been hurt by slack sales as the weak U.S. economy saps consumption and pressures prices. The company’s shares have lost more than 90 percent of their value since 2001.
“Fleets of older, coal-fired power plants were a license to print money when gas was at $8 (per MMBTU),” said Sanford Bernstein analyst Hugh Wynne. “At much lower gas prices prevailing today … these units are facing very challenging economics.”
Blackstone has made other bets on power. It made about six times its money when it, along with other private equity firms, bought and then quickly sold Texas Genco to NRG in 2005. Blackstone was also part of a team which mulled counterbidding for TXU in 2007, a source told Reuters at the time.
The firm invested in independent power producer Sithe Global in 2005. Its energy investments are led by David Foley, who has been at Blackstone since 1995 and was involved in all three deals.
Buyout firms are sitting on lots of capital and have been under pressure to invest those funds. Blackstone said in July that the backlog of deals it was working on was the highest in years, but getting financing remained difficult.
Blackstone’s deal for Dynegy is not subject to financing conditions as Blackstone is injecting all the equity to pay the cash part of the deal and assuming Dynegy’s debt. The company has $4.66 billion in debt and about $500 million in cash.
A substantial amount of its debt is unsecured bonds, which do not have change of control provisions, a source familiar with the situation said.
That means Blackstone does not have to refinance the debt. In a normal leveraged buyout situation, the private equity buyers refinance the debt and the buyers have to inject at least 30 percent equity. Blackstone’s equity stake in the deal is therefore low by historic standards.
Blackstone is also receiving $1.36 billion in cash, as under a separate agreement it will sell to NRG Energy four natural gas-fired assets owned by Dynegy — among the company’s best assets.
Analysts at CreditSights said in a research report that because of these factors, not only is Blackstone not required to put any money into the deal, it could get around $800 million back once the deals close.
Dynegy shareholders will receive $4.50 cash per share, a 62 percent premium over Dynegy’s closing price Thursday, which was an eight-year low.
Shares of Dynegy jumped 60 percent, or $1.66, to $4.44. The company’s 7.75 percent bond due 2019 fell 3.5 cents on the dollar to 65.5 cents, according to MarketAxess.
Dynegy’s largest shareholder, New York-based investment fund Donald Smith & Co., took a 7.25 percent stake in the quarter ended June 30 when the share price was an average of $5.6492.
The deal includes a “go-shop” provision for 40 days when Dynegy can solicit other offers. However, there are no obvious alternative bidders, said analysts at UBS.
The deal is subject to regulatory approval. While utility deals are difficult to complete because the companies need to pick up regulatory approvals from state and federal regulators, Dynegy’s assets are unregulated, makingBlackstone’s path easier.
Dynegy, which once sought to challenge Enron Corp. in the power trading business and even sought to buy the disgraced energy company shortly before its demise, has focused in the last several years on operating its power plants in the Midwest, Northeast and West.
Dynegy sells power to the wholesale markets and operates more than 12,000 megawatts of power plants. Dynegy’s remaining assets are a mix of gas-fired and coal plants.
Goldman Sachs advised Dynegy. Credit Suisse and Blackstone’s advisory unit advised Blackstone.
