New Frontier for Dynegy Post-Blackstone (DYN, BX, NRG)

Dynegy Inc. (NYSE: DYN) is one of the country’s largest electric power producers. In August, the company’s board announced an offer from the world’s largest private equity firm, Blackstone Group LP (NYSE: BX), to buy Dynegy for $4.50/share, a premium of more than 60% to the company’s share price at the time. That deal is now dead, as Dynegy’s two largest shareholders, Seneca Capital and Icahn Associates, have refused to sign on.

As part of the deal for Dynegy, Blackstone had agreed to sell four of the company’s power plants to NRG Energy Inc. (NYSE: NRG) for $1.36 billion once Blackstone had completed the acquisition. The sale of the plants to NRG was contingent on a successful acquisition. NRG’s CEO has said that the outlook for power prices has fallen since August, and that NRG would not offer the same price today.

The deal between Dynegy and Blackstone failed primarily on the objections of both Seneca Capital and Icahn Associates, both of which believed that Dynegy was worth more than the $5/share that Blackstone ultimately offered on November 17th in an effort to win over shareholders. Both Seneca and Icahn were holding out for around $7/share.

Dynegy has decided to open a formal process to sift through strategic alternatives and “to solicit proposals from potentially interested parties and carefully review its standalone restructuring alternatives,” according to the company’s press release.  Under the terms of the Blackstone deal, Dynegy had 40 days to seek competing bids, and none turned up. Maybe this time will be different, but that seems unlikely.

Dynegy also announced today that it had adopted a new Stockholder Protection Rights Plan under which each current shareholder receives one stock purchase right for each share owned at close of business on December 2, 2010. According to the press release, the board “adopted this short term, narrowly tailored Rights Plan to prevent any person from obtaining control or de facto control of Dynegy without offering a control premium to all Dynegy stockholders.” In other words, Carl, don’t even think about making a solo offer for Dynegy. Icahn has already offered to supply a $2 billion line of credit to Dynegy

Blackstone is scheduled to receive a $16.3 million break-up fee if Dynegy is sold for more than $4.50/share within the next 18 months.  Dynegy shares are off about -4.5% this morning, and Blackstone shares are off about -2%.  Dynegy shares went from under $3 to above $4.50 after the merger announcement.  Shares later on went to above $5.00 as the deal was expected to grow in size.  Now that the deal is off, Dynegy shares are still up at $4.93.

Paul Ausick