Shares of El Paso, Dynegy and Williams are trading at discounts to “liquidation values,” making them attractive takeover targets, according to a report released last Monday by Credit Suisse First Boston. The investment house predicts a recovery of 40-50% from the group in the next three to six months.

“We view the current valuation of Dynegy to be little more than the value of its contract to market the production of Chevron/Texaco. At Williams we estimate the value of its pipelines exceeds its current share price, and that additional information on its credit line renewal and common share dividend will allow recovery also. At EP, the value of its pipeline and production units exceeds its current price by more than 50%,” according to the Credit Suisse report “Natural Gas & Power — M&A Review: More Buyers Than Sellers; 50% Discounts to PMVs.”

The report also sees an excess of capital available to take advantage of the extensive assets sales that the three and other merchant energy and trading companies will be making in order to improve their credit ratings. This will provide a “vibrant merger and acquisition market” over the next several years.”

The buying power will come from European and Canadian companies, master limited partnerships (MLP) and U.S. utility companies, Credit Suisse First Boston said. The report, authored by Curt Launer, Philip Salles and Faisel Khan, said “Our analysis shows asset sale potential successes, favorable commodity price comparisons after 2Q’02, earnings growth of 5%-10% (without merchant units contributing) and improved balance sheets being achieved over the next 3-6 months.”

The report estimates $8 to $10 billion of asset sales will be completed this year. It lists potential domestic buyers as American Electric Power (AEP), TXU, Dominion, Duke Energy and Sempra Energy. In Canada Enbridge, TransAlta and TransCanada are potential buyers. Europe’s British Energy, Centrica plc, E.on, Endesa, Enel, Iberdrola, National Grid and RWE AG may also be scouting asset acquisitions. Among the MLPs, there is potential for El Paso Energy, Enbridge Energy and Kinder Morgan to see some action.

On the asset sale side Credit Suisse lists AEP, AES Corp., Aquila, Cinergy, CMS, Dynegy, El Paso, Enel, Enron, Mirant, TXU, and Williams, as seeking to raise sums ranging between $500 million and $3 billion.

Besides asset sales, “we also do not rule out total company purchases and believe that the time may be right for the ‘majors’ to step into the industry. With the merchant group trading at 30%-40% of private market values, we view the consolidation factor as another view toward the recovery of the group that we expect.”

The report has an extensive analysis of the asset pricing history of various types of assets, noting “it is important that these companies sell assets at appropriate prices in order to recoup the loss in cash flows from the assets.”

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