Dynegy, Illinova Announce $2 Billion Merger Deal
The merger bandwagon continued Monday with the announcement of a
$2 billion deal that would bring together Illinois-headquartered
Illinova Corp., which has a strong Midwest power generation base
and a developing national energy services business, with
Houston-based Dynegy Inc., a leading marketer of energy products
and services. The merged company would be called Dynegy.
"While our combined company will be larger in scale, the primary
benefit of this merger results from the scope and skills we will
have to effectively compete in the national energy marketplace,"
said Dynegy Chairman and CEO Chuck Watson, who will hold the same
title at the new company.
Ed Tirello, an analyst with Deutsche Banc Alex. Brown, said he
likes the deal. Although Illinova doesn't have much in the way of
growth opportunities, it is a stable utility. Dynegy, which has a
much higher growth rate of 20% to 25%, gets a "nice" retail base in
the middle of the country and a good transmission grid in return,
Charles Bayless, chairman, president and CEO of Illinova, will
be a non-executive director of the new company. "Since forming our
holding company in 1994, we have worked to develop national and
international capabilities in the unregulated energy industry
through Illinova Generating and Illinova Energy Partners."
Both companies are independent power developers and producers.
The combined company is expected to own more than 15,000 gross
megawatts of domestic generating capacity representing the nation's
most geographically diverse generating asset portfolio. Illinova
has filed with regulators to transfer its generating assets to an
unregulated subsidiary. Illinova's gas and electric utility
subsidiary serves 650,000 customers, and Dynegy is the largest
marketer of gas liquids in the United States.
"This merger advances our strategic plan through the addition of
strategically located generation assets, which will enable Dynegy
to enhance its position as one of the nation's leading energy
merchants," Watson said. "The combined company will have control
over the assets needed to compete across nearly the entire energy
value chain - from generation, to delivery, to wholesale and retail
marketing and trading."
The new company is expected to generate about 70% of its
earnings and cash flow from non-regulated activities, based on
estimated results for 2000. The contribution from non-regulated
activities is expected to grow as the new company invests in new
generation assets as part of a capital expenditure program of about
$1 billion per year over the next five years.
The companies intend to use Dynegy's marketing, trading and risk
management capabilities to integrate Illinova's physical generation
assets in the Midwest with a multi-regional supply perspective.
Earnings from the regulated transmission and distribution business
are expected to provide a stable platform from which to pursue
strategic growth opportunities.
The companies anticipate the elimination of about 5% of the
combined 6,500-person work force over time and will seek to
minimize work-force effects of the merger through reduced hiring,
attrition, voluntary separation programs and other measures.
The new company will adopt an initial annual dividend of 60
cents/share. Illinova shareholders who stick around will see their
dividend cut by more than 50% as the deal with Dynegy transforms
their company from an income to a growth investment.
Annual pre-tax revenue enhancements and cost savings between
$125 million and $165 million are expected. About two-thirds of
synergies are attributable to revenue enhancement related to
Illinova's generation assets, and one-third is attributable to cost
savings related to staff cuts and elimination of duplicate
corporate programs. The merger is expected to be accretive to the
earnings of both shareholder groups in the first year.
The boards of each company approved the deal, which is supported
by Dynegy's industrial shareholders, who hold 76% of the
outstanding stock. The merger would create a parent company to
acquire all Dynegy and Illinova shares for a combination of stock
and cash. About 60% of the consideration received by Dynegy's
shareholders will be stock. Dynegy shareholders may elect to
exchange each Dynegy share for 0.69 share of the new company, based
on a fixed exchange ratio, or elect to receive $16.50 per share in
cash consideration, subject to proration. In aggregate, the cash
portion of the consideration will be about $1.06 billion. Illinova
shareholders will exchange their shares on a share-for-share basis.
Following the transaction, Dynegy's shareholders will own slightly
more than 50% of the new company. The combination will be accounted
for as a purchase of Illinova by Dynegy.
Chevron USA, which owns a 29% interest in Dynegy, voted in favor
of the merger and has elected to take all stock. Chevron also will
invest $200 million of new equity capital in the combined company
and up to an additional $40 million, subject to terms and
conditions. "We are pleased to be taking another major step forward
in our strategic relationship with Dynegy," said Peter Robertson, a
Chevron vice president and member of the Dynegy board of directors.
"This additional move into the energy convergence business
represents an exciting earnings growth opportunity for Chevron."
NOVA Chemicals and BG, which each currently owns about 24% of
Dynegy, agreed to vote in favor of the merger and have elected to
receive all cash in the transaction, subject to proration based on
the cash election of Dynegy's public shareholders. BG and NOVA
Chemicals have also agreed to hold their remaining ownership
interest in the combined company in the form of new convertible
preferred stock, which is expected to represent no more than about
25% of their current holdings.
The merger, expected to close by the end of the first quarter
2000, is conditioned, among other things, upon the completion of
the pending sale of Illinova's Clinton Power Station, approvals of
the Federal Energy Regulatory Commission, the Securities and
Exchange Commission, the Illinois Commerce Commission, Illinova's
common stockholders and the expiration or termination of the
Hart-Scott-Rodino waiting period.
Dynegy shares closed down 7/16 at 18 ¬ Monday, and Illinova
closed up 5/16 at 25 5/8. Duff & Phelps Credit Rating placed
ratings of Illinois Power on rating watch, up, and Moody's
Investors Service affirmed its ratings of Dynegy and Illinova, as
well as Illinois Power and said the ratings outlook is negative for