The merger bandwagon continued Monday with the announcement of a$2 billion deal that would bring together Illinois-headquarteredIllinova Corp., which has a strong Midwest power generation baseand a developing national energy services business, withHouston-based Dynegy Inc., a leading marketer of energy productsand services. The merged company would be called Dynegy.
“While our combined company will be larger in scale, the primarybenefit of this merger results from the scope and skills we willhave to effectively compete in the national energy marketplace,”said Dynegy Chairman and CEO Chuck Watson, who will hold the sametitle at the new company.
Ed Tirello, an analyst with Deutsche Banc Alex. Brown, said helikes the deal. Although Illinova doesn’t have much in the way ofgrowth opportunities, it is a stable utility. Dynegy, which has amuch higher growth rate of 20% to 25%, gets a “nice” retail base inthe middle of the country and a good transmission grid in return,he noted.
Charles Bayless, chairman, president and CEO of Illinova, willbe a non-executive director of the new company. “Since forming ourholding company in 1994, we have worked to develop national andinternational capabilities in the unregulated energy industrythrough Illinova Generating and Illinova Energy Partners.”
Both companies are independent power developers and producers.The combined company is expected to own more than 15,000 grossmegawatts of domestic generating capacity representing the nation’smost geographically diverse generating asset portfolio. Illinovahas filed with regulators to transfer its generating assets to anunregulated subsidiary. Illinova’s gas and electric utilitysubsidiary serves 650,000 customers, and Dynegy is the largestmarketer of gas liquids in the United States.
“This merger advances our strategic plan through the addition ofstrategically located generation assets, which will enable Dynegyto enhance its position as one of the nation’s leading energymerchants,” Watson said. “The combined company will have controlover the assets needed to compete across nearly the entire energyvalue chain – from generation, to delivery, to wholesale and retailmarketing and trading.”
The new company is expected to generate about 70% of itsearnings and cash flow from non-regulated activities, based onestimated results for 2000. The contribution from non-regulatedactivities is expected to grow as the new company invests in newgeneration assets as part of a capital expenditure program of about$1 billion per year over the next five years.
The companies intend to use Dynegy’s marketing, trading and riskmanagement capabilities to integrate Illinova’s physical generationassets in the Midwest with a multi-regional supply perspective.Earnings from the regulated transmission and distribution businessare expected to provide a stable platform from which to pursuestrategic growth opportunities.
The companies anticipate the elimination of about 5% of thecombined 6,500-person work force over time and will seek tominimize work-force effects of the merger through reduced hiring,attrition, voluntary separation programs and other measures.
The new company will adopt an initial annual dividend of 60cents/share. Illinova shareholders who stick around will see theirdividend cut by more than 50% as the deal with Dynegy transformstheir company from an income to a growth investment.
Annual pre-tax revenue enhancements and cost savings between$125 million and $165 million are expected. About two-thirds ofsynergies are attributable to revenue enhancement related toIllinova’s generation assets, and one-third is attributable to costsavings related to staff cuts and elimination of duplicatecorporate programs. The merger is expected to be accretive to theearnings of both shareholder groups in the first year.
The boards of each company approved the deal, which is supportedby Dynegy’s industrial shareholders, who hold 76% of theoutstanding stock. The merger would create a parent company toacquire all Dynegy and Illinova shares for a combination of stockand cash. About 60% of the consideration received by Dynegy’sshareholders will be stock. Dynegy shareholders may elect toexchange each Dynegy share for 0.69 share of the new company, basedon a fixed exchange ratio, or elect to receive $16.50 per share incash consideration, subject to proration. In aggregate, the cashportion of the consideration will be about $1.06 billion. Illinovashareholders will exchange their shares on a share-for-share basis.Following the transaction, Dynegy’s shareholders will own slightlymore than 50% of the new company. The combination will be accountedfor as a purchase of Illinova by Dynegy.
Chevron USA, which owns a 29% interest in Dynegy, voted in favorof the merger and has elected to take all stock. Chevron also willinvest $200 million of new equity capital in the combined companyand up to an additional $40 million, subject to terms andconditions. “We are pleased to be taking another major step forwardin our strategic relationship with Dynegy,” said Peter Robertson, aChevron vice president and member of the Dynegy board of directors.”This additional move into the energy convergence businessrepresents an exciting earnings growth opportunity for Chevron.”
NOVA Chemicals and BG, which each currently owns about 24% ofDynegy, agreed to vote in favor of the merger and have elected toreceive all cash in the transaction, subject to proration based onthe cash election of Dynegy’s public shareholders. BG and NOVAChemicals have also agreed to hold their remaining ownershipinterest in the combined company in the form of new convertiblepreferred stock, which is expected to represent no more than about25% of their current holdings.
The merger, expected to close by the end of the first quarter2000, is conditioned, among other things, upon the completion ofthe pending sale of Illinova’s Clinton Power Station, approvals ofthe Federal Energy Regulatory Commission, the Securities andExchange Commission, the Illinois Commerce Commission, Illinova’scommon stockholders and the expiration or termination of theHart-Scott-Rodino waiting period.
Dynegy shares closed down 7/16 at 18 ¬ Monday, and Illinovaclosed up 5/16 at 25 5/8. Duff & Phelps Credit Rating placedratings of Illinois Power on rating watch, up, and Moody’sInvestors Service affirmed its ratings of Dynegy and Illinova, aswell as Illinois Power and said the ratings outlook is negative forall three.
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