Stung by extremely weak commodity chemicals prices, Nova Corp.announced its intention last week to sell its 26% interest (38.8million shares) in Dynegy Corp. (formerly NGC Corp.) and use thepotential $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 marketplacehas assessed “little or no value” to Nova’s investment in theHouston-based marketing and processing company. Lipton said hebelieves in Dynegy’s management strategy and expects to continue apositive working relationship with the company. “However, it is inthe best interest of Nova shareholders to redeploy the resources.”

Dynegy CEO Chuck Watson said Dynegy’s board was alerted aboutthe sale on Friday (Aug. 21). He said Dynegy “understands Nova’sdesire to divest” given its new corporate focus in chemicals, whichfollowed the spin-off/merger with TransCanada in June.

At least one analyst, however, believes the relationship betweenthe two companies went sour. “Nova said they were getting out of itbecause they wanted to concentrate more on the chemicals business,but I think part of it was because Dynegy is not doing that greatand may have serious problems – more than are obvious at firstlook,” said Jofree Corp. Principle Carol Freedenthal. “Their stockreflects that a number of people have lost enthusiasm. When theylost Tom Matthews [to Washington Water Power subsidiary Avista], Ithink that was an indication that the need to get a differentculture suddenly was slowed down. They have lost some other peopleas well. Watson also announced he was going to stop doing all hisother things, like being a hockey man. I think it just indicates aserious 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 youwonder,” he said. “I mean they could have waited at least untilwinter. We heard during the electrical fiasco in June that they hadlost big money, but out of their quarterly report it sounds likethey did all right. Something has to be [wrong]. I think if youknow accounting well enough you can postpone the inevitable and Ithink they took that course.”

Other analysts said the move was expected, however. Followingthe spin-off of Nova Chemicals, now Nova Corp., Lipton indicatedthe company would concentrate on core chemicals operations,possibly raising its stake in Methanex Corp., the world’s largestmethanol producer. Nova currently owns a 26% interest in Methanex.Lipton said last week Nova still had not decided where to investthe proceeds from the Dynegy divestiture.

The deal possibly could involve an asset swap with one of theother Dynegy owners, Chevron or British gas distributor BG plc. Thetwo other Dynegy owners had rights of first offer for the sharesbut the time limit on those rights passed without action. Chevronspokesman Mike Libby noted Chevron has had an “interest for sometime in increasing our share in Dynegy and the primary factor hasbeen doing so at the right price for our stockholders.”

Nova now intends to shop its shares on the market. If it findsan offer, Chevron and BG still have rights of first refusal tomatch. Dynegy shares were trading at just above $10/share at theend of the week, way down from the $20/share 52-week high and belowthe $12 52-week low. Nevertheless, Lipton said the sales price ofabout $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 pricecould benefit from the sale if it resulted in more Dynegy sharesbeing traded in the marketplace. “If they sell it into themarketplace, I view that as a positive because one of the thingsDynegy lacks is float. There’s just not that much out there totrade. The thinner the float, the more difficult it is forinstitutions to own a stock. Only 8% of Dynegy is owned byinstitutions. Most of the gas stocks are held 30-50% byinstitutions. You need to have a market in a stock for it to tradeeffectively.

“If they want quick money, they’ll go to Chevron or BG,” saidEassey. “My personal opinion is that as you look forward, and we’reheading into winter, a lot of positive things could happen in thegas industry that could translate into a better stock price downthe road for this stock. But right now weather is pretty moderateand everything is in the tank. So it’s not necessarily the besttime to be out there trying to sell energy instruments.”

A Dynegy spokeswoman said the company should suffer no illeffects in Canada from the deal despite losing the best possibleCanadian partner. She referred to Dynegy Canada’s recent $39million acquisition of the midstream gas processing facilities andgathering lines of Compton Petroleum Corp. as part of the company’scontinuing expansion north of the border. Included in that dealwere the Mazeppa and Gladys gas plants in southern Alberta andabout 78 miles of associated gathering lines. The two facilitieshave a combined capacity to process 97 MMcf/d of sour gas. “We havea strong position in Canada and expect no change in our operationsthere following the sale by Nova,” she said.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.