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Dynegy Commits $$$ to Broadband
Dynegy Inc. has signaled its commitment to add telecommunications to its natural gas and power interests with an investment of more than half a billion dollars, including the $152 million purchase of a Colorado-based communications solutions and network company.
Leveraging its merchant talents into another national utility network, that of broadband communications, Dynegy said it has signed a letter of intent to purchase Extant, Inc. The purchase price includes $60 million in cash and 1.25 million shares of Dynegy common stock.
Following the transaction, Dynegy will establish Dynegy Global Communications, a new division that will own 80% of a limited partnership to be called Dynegy Connect. Telstrat Corp. Ltd., an Australian telecommunications and information services company, owns a 17% interest in Extant and has signed a memorandum of understanding to own a 20% interest in Dynegy Connect.
Dynegy is committed to an additional investment of $400 million to complete development and implementation of the network currently being assembled by Extant. Dynegy Connect will deploy a smart-build strategy utilizing leases, alliances, ownership or control over existing fiber routes.
In a conference call last week, Dynegy Chairman Chuck Watson said the transaction would be slightly dilutive to Dynegy earnings this year and next. Dynegy estimates it will cut earnings 10-15 cents this year and 5-10 cents in 2001, with the prospect of building a $2 to $3 billion business by 2003-4.
Despite the "slight dilution" the company expects to meet analysts' consensus for 2001, he added.
"This transaction enables Dynegy to execute its long-term strategy to become a leader in the broadband marketing and trading arena, while remaining focused on the tremendous opportunities in energy convergence," Watson said. Dynegy's strategy is to follow the path it set in natural gas and power by building an asset-based business before moving into broadband trading.
Extant's network has been deployed in 28 U.S. cities and 40 cities are expected to be operational by the end of the year. More than 100 cities are set to be fully deployed by 2003. On completion the joint venture network will consist of approximately 80,000 fiber miles and 20,000 route miles.
Dynegy will not be trading bandwidth "real soon. That's possibly a year or three off," the Dynegy CEO said. Broadband communications is projected to grow to a $400 billion market or about twice the size of the current power market. "This is clearly a market that is too big for Dynegy to ignore. Even if we achieve 5% market share, it would exceed the earnings contribution from (Dynegy's) power and gas business today."
Watson stressed the strength of the deal was in the "combined intellectual capital:" Dynegy's in marketing and trading, and Extant's in the communications business and technology. "This acquisition launches Dynegy into the communications marketplace through the addition of management expertise, market intelligence, network access and control, and sophisticated operating and connectivity software systems." Extant Chairman Larry McLernon, will become executive vice president of Dynegy Inc. and CEO of the Dynegy Global Communications division.
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