In the end, a $5/share offer by a unit of the Blackstone Group LP failed to get a majority of shareholder support, so Dynegy Inc. last Tuesday said the merger agreement was terminated, taking with it a related sale of some natural gas-fired power plants to NRG Energy Inc. Opposition from major shareholders representing more than 20% of Dynegy’s shares has been unrelenting.
Following a special shareholders’ meeting in Houston, the former gas marketing pioneer confirmed that a preliminary count of votes showed the Blackstone offer failed to get enough support, and therefore the Houston-based independent power provider intends to look at alternatives.
Earlier in the day, the two companies said in a statement that they expected to announce the termination of their merger agreement following the special shareholders meeting. In separate announcements, Dynegy said it would work with one of the major shareholders, the hedge fund Seneca Capital, “to immediately appoint an independent director on its board and a special [board] committee” to direct a review of strategic alternatives.
Dynegy also said its board has adopted a stockholder protection rights plan and declared a dividend of one stock purchase right for each share of stock held by shareholders of record as of the close of business Dec. 2.
Dynegy CEO Bruce Williamson said the company will “move forward initiating an open strategic alternatives process to maximize stockholder value.”
In its statement Blackstone lamented the continuing opposition to its offer from Seneca and billionaire Carl Icahn, another major holder of Dynegy shares. Further on Tuesday, Newco Energy Acquisition Holdings (NEAH) and a self-described industry executive, Karl Miller, repeated their call from Monday that Dynegy shareholders “quickly gain control of the company” to prevent what they described as “destructive behavior by the current board and management.”
Since its original offer (see NGI, Aug. 16), the deal has been buffeted by cries from major shareholders that the offer was undervaluing Dynegy’s assets, which once were among one of the nation’s largest power plant portfolios. Even with endorsement from the Institutional Shareholder Services and approval by the Federal Energy Regulatory Commission, the large holders of Dynegy stock appear to have prevailed.
“Now that the Blackstone distraction has been removed from the table, Dynegy’s board and management has immediately thrown another land mine in front of shareholders who are seeking to turn Dynegy around and into a profitable growth company,” said NEAH and Miller in a joint response to the company’s announcement on the “open strategic alternatives process” and the board’s creation of a short-term “narrowly tailored” shareholders’ rights plan “to prevent any person from obtaining control or de facto control of Dynegy without offering a control premium to all Dynegy shareholders.”
In its announcement, Dynegy said the board’s move “is not intended to prevent a sale of control of the company that is determined by the board to be fair, advisable and in the best interests of all Dynegy stockholders.”
NEAH and Miller reiterated that they think the board and management of Dynegy is “acting outside the scope of their fiduciary obligations, and continue to act outside the will of all shareholders, and continue to work for their own self-interest and ego.” Thus, they want the shareholders to “immediately focus” on replacing the board and management.
Originally, Dynegy, formerly the Natural Gas Clearinghouse, one of the first large natural gas marketers, appeared headed for a buyout by an affiliate of Blackstone for $4.7 billion ($542.7 million cash and the rest acquired debt), with a separate, related transaction calling for NRG to buy four Dynegy plants from Blackstone plus another plant from an additional party.
At the time of the original Blackstone offer,. NRG signed a definitive agreement with its affiliate to purchase 3,884 MW of Dynegy natural gas-fired assets in California and Maine for $1.36 billion, or $351/kilowatt. In a separate transaction, NRG has agreed to acquire the Cottonwood Generating Station, a 1,279 MW gas-fueled plant in the Entergy zone of east Texas, from Kelson Limited Partnership for $525 million, or $410/kilowatt.
At that time, NRG said it intended to fund both acquisitions with a combination of cash and other funding sources, and it was confident that both acquisitions would be closed by year end.
Meanwhile, from Blackstone, shareholders of Dynegy were to receive $4.50 in cash for each outstanding Dynegy common share, later sweetened to $5 earlier this month. The original offer represented a 62% premium to Dynegy’s closing share price on Aug. 12, the day before the deal was made public.
During the recent weeks of public sparring with major shareholders opposing the deal Dynegy argued that the growing prospects for depressed natural gas prices and the accelerated advent of shale gas made it crucial for Blackstone’s $4.50/share offer to be approved by shareholders. With the dramatically changed natural gas situation contributing to its outlook, Dynegy reiterated in its public statements that it faces $1.6 billion in negative free cash flow during the next five years.
“Dynegy’s long-term capital needs require funding to address the projected $1.6 billion of negative free cash flow over the next five years resulting from the significant change in the U.S. natural gas market and significant environmental enforcement uncertainty,” Dynegy said in rebuffing a $2 billion line of credit offer from hedge fund manager Icahn.
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