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Nova Puts 26% Share in Dynegy Up for Sale

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 effectively.

"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.

Rocco Canonica

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ISSN © 2577-9877 | ISSN © 1532-1266
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