Nova Puts 26% Share in Dynegy Up for Sale
Stung by extremely weak commodity chemicals prices, Nova Corp.
announced its intention last week to sell its 26% interest (38.8
million shares) in Dynegy Corp. (formerly NGC Corp.) and use the
potential $460 million in proceeds to shore up core operations.
Although Nova CEO Jeffery Lipton stressed the company has been
"pleased with the progress" made by Dynegy, he said the marketplace
has assessed "little or no value" to Nova's investment in the
Houston-based marketing and processing company. Lipton said he
believes in Dynegy's management strategy and expects to continue a
positive working relationship with the company. "However, it is in
the best interest of Nova shareholders to redeploy the resources."
Dynegy CEO Chuck Watson said Dynegy's board was alerted about
the sale on Friday (Aug. 21). He said Dynegy "understands Nova's
desire to divest" given its new corporate focus in chemicals, which
followed the spin-off/merger with TransCanada in June.
At least one analyst, however, believes the relationship between
the two companies went sour. "Nova said they were getting out of it
because they wanted to concentrate more on the chemicals business,
but I think part of it was because Dynegy is not doing that great
and may have serious problems - more than are obvious at first
look," said Jofree Corp. Principle Carol Freedenthal. "Their stock
reflects that a number of people have lost enthusiasm. When they
lost Tom Matthews [to Washington Water Power subsidiary Avista], I
think that was an indication that the need to get a different
culture suddenly was slowed down. They have lost some other people
as well. Watson also announced he was going to stop doing all his
other things, like being a hockey man. I think it just indicates a
serious time for them and says that Nova was not totally pleased."
Freedenthal noted Nova picked a terrible time to divest.
Dynegy's stock prices are below a 52-week low. "It really makes you
wonder," he said. "I mean they could have waited at least until
winter. We heard during the electrical fiasco in June that they had
lost big money, but out of their quarterly report it sounds like
they did all right. Something has to be [wrong]. I think if you
know accounting well enough you can postpone the inevitable and I
think they took that course."
Other analysts said the move was expected, however. Following
the spin-off of Nova Chemicals, now Nova Corp., Lipton indicated
the company would concentrate on core chemicals operations,
possibly raising its stake in Methanex Corp., the world's largest
methanol producer. Nova currently owns a 26% interest in Methanex.
Lipton said last week Nova still had not decided where to invest
the proceeds from the Dynegy divestiture.
The deal possibly could involve an asset swap with one of the
other Dynegy owners, Chevron or British gas distributor BG plc. The
two other Dynegy owners had rights of first offer for the shares
but the time limit on those rights passed without action. Chevron
spokesman Mike Libby noted Chevron has had an "interest for some
time in increasing our share in Dynegy and the primary factor has
been doing so at the right price for our stockholders."
Nova now intends to shop its shares on the market. If it finds
an offer, Chevron and BG still have rights of first refusal to
match. Dynegy shares were trading at just above $10/share at the
end of the week, way down from the $20/share 52-week high and below
the $12 52-week low. Nevertheless, Lipton said the sales price of
about $460 million would be "almost double" the value of Nova's
$260 million 1994 investment in Dynegy.
Merrill Lynch analyst Donato Eassey said Dynegy's stock price
could benefit from the sale if it resulted in more Dynegy shares
being traded in the marketplace. "If they sell it into the
marketplace, I view that as a positive because one of the things
Dynegy lacks is float. There's just not that much out there to
trade. The thinner the float, the more difficult it is for
institutions to own a stock. Only 8% of Dynegy is owned by
institutions. Most of the gas stocks are held 30-50% by
institutions. You need to have a market in a stock for it to trade
"If they want quick money, they'll go to Chevron or BG," said
Eassey. "My personal opinion is that as you look forward, and we're
heading into winter, a lot of positive things could happen in the
gas industry that could translate into a better stock price down
the road for this stock. But right now weather is pretty moderate
and everything is in the tank. So it's not necessarily the best
time to be out there trying to sell energy instruments."
A Dynegy spokeswoman said the company should suffer no ill
effects in Canada from the deal despite losing the best possible
Canadian partner. She referred to Dynegy Canada's recent $39
million acquisition of the midstream gas processing facilities and
gathering lines of Compton Petroleum Corp. as part of the company's
continuing expansion north of the border. Included in that deal
were the Mazeppa and Gladys gas plants in southern Alberta and
about 78 miles of associated gathering lines. The two facilities
have a combined capacity to process 97 MMcf/d of sour gas. "We have
a strong position in Canada and expect no change in our operations
there following the sale by Nova," she said.