In a move usually reserved for the late stages of acquisitions — and unheard of less than a month after an initial agreement — Dynegy Corp. is in advanced discussions with Enron Corp. to renegotiate its merger offer of Nov. 9 to acquire the Houston-based rival. According to sources, Dynegy wants to reduce the all-stock transaction price by more than 40%, which would put its share price at about $6. Enron closed at $4.11 on Tuesday, 10 cents above its Monday close.

Both sides apparently are working out how to apply a new share exchange ratio. Under the original terms of agreement, Dynegy offered to exchange 0.2685 of a share for each Enron share. Based on Monday’s closing price of $39.25 for Dynegy, Enron shareholders would receive about $10.53 a share, worth about $9 billion. What Dynegy now appears to be working toward is a share offer of less than 0.15 of a share for every Enron share, which would put the share portion of the transaction at $6 for each Enron share, or $5 billion.

While no official announcement was forthcoming Tuesday morning, sources said Enron also is working to extend the maturity dates of some of its debt, estimated to be about $13 billion total. Apparently, however, potential investors are alarmed that most of Enron’s hard assets have already been used as collateral for loans, so they cannot be used to support additional funding. Enron’s core business, its wholesale trading and marketing activity, appears also to have taken a severe dive in the past three weeks. One source pointed out that while a number of companies are continuing to trade with Enron, they are doing mostly short-term deals, which usually carry the lowest margins and will not help Enron’s earnings.

A consortium of bankers, led by J.P. Morgan, Chase and Citigroup has been trying to raise up to $2 billion for Enron in the past two weeks, but apparently has been denied by several major investors, including the Carlyle Group Inc., Blackstone Group LP and Saudi Arabian billionaire Prince Alwaleed bin Talal.

The biggest problem for potential investors is not only Enron’s declining marketing picture but its growing debt. In less than a month, Enron has incurred close to $4 billion worth of debt — mostly on its prized U.S. natural gas pipeline assets. Northern Natural Gas Co. was part of the linchpin that put the Dynegy merger in motion, with Dynegy and its co-investor ChevronTexaco Inc. injecting $1.5 billion into as part of the original agreement. There is also another $500 million in unsecured public debt on the system, and the bank consortium secured another $450 million in cash based on Northern’s assets. The bank consortium also provided $550 million to Enron against its Transwestern Pipeline Co. assets.

In total, Enron’s two major U.S. pipe systems have about $4 billion of debt between them, short of the generated revenue the two reported in the third quarter. Northern reported revenue of $77 million and Transwestern reported $41 million for the third quarter. Enron’s entire pipe business only produced pre-tax earnings of $85 million in the third quarter, which was flat from earnings in the third quarter of 2000. In the event that Enron collapsed, analysts suggest there will be problems in determining which creditors have claim on the assets.

According to sources, both companies’ negotiators had returned to Houston on Monday after meeting in New York City with investor groups about the transaction. Dynegy spokesman John Sousa said Tuesday that no announcements had been scheduled by the company, but he said negotiations were continuing.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.