The proposed merger of Dynegy Inc and the beleaguered Enron Corp collapsed Wednesday after Dynegy pulled out of the deal.
The move could force Enron, once the nation's largest energy trader, to seek bankruptcy protection from its creditors.
Earlier Wednesday, two credit-rating agencies downgraded Enron's debt to junk bond status. Dynegy said in a statement that it was abandoning the deal because of Enron's "breaches of representations, warranties, covenants and agreements in the merger agreement."
"While it is regrettable to see a leading industry player in difficulties, this does not reflect a failure of the energy merchant business," said Chuck Watson, Dynegy's chairman and chief executive.
The proposed takeover had been on the rocks for weeks as investors worried about Enron's ability to pay its bills. Last week, Enron announced that it was scheduled to make a US$690 payment on Tuesday, but later received assurances from lenders that the payment would be deferred.
Enron officials did not immediately return calls for comment Wednesday afternoon.
Dynegy also said it was exercising its option to buy Enron's Northern Natural Gas pipeline, using a US$1.5 billion investment from the ChevronTexaco Corp, which owns 26 percent of Dynegy. Northern Natural operates 16,500 miles of natural gas pipeline.
Standard & Poor's cut its credit rating of Enron's debt to junk bond status and expressed concerns about the company's ability to survive if the merger plans do not go forward. Moody's Investors Service followed S&P's lead around midday and cut its rating to junk bond status as well.
Shares of Enron fell more than 70 percent on the S&P downgrade, before trading was halted Wednesday afternoon, even before Dynegy's announcement, as investors became more doubtful about the deal.
Enron's stock fell US$2.91 to $1.20 on Wednesday. The stock was both the most actively traded issue and biggest percentage loser Wednesday on the New York Stock Exchange. The stock is down more than 95 percent from its 52-week high.
Dynegy, which was also halted Wednesday afternoon, last traded at US$4.08, or 10 percent lower, at $36.81.
Standard & Poor's trimmed Enron's rating to single-B-minus, a speculative grade. The agency said it was concerned about the viability of a completed merger between the two companies. Bankruptcy, the agency said, was a "distinct possibility" for the beleaguered Enron should the merger talks fail.
S&P also said its rating on Dynegy would "remain on credit watch with negative implications."
"Dynegy's absorption of Enron's energy marketing and trading operations could enhance the business profile by strengthening its commercial position," S&P said in a statement. "However, given Enron's distressing financial position, the transaction could put greater financial strain on Dynegy."
Before a series of financial disclosures sent Enron's stock into collapse and the company into the arms of Dynegy, its Houston-based rival, Enron's natural gas and electricity trading floors did more business than the two largest competitors combined. They also accounted for the majority of Enron's profits by far.
But traders and Wall Street analysts said the business had steadily deteriorated amid questions about the depths of Enron's financial straits. Many traders have curtailed dealings with Enron, and the executives close to the talks said Dynegy officials scouring Enron's books were having difficulty this week figuring out how much cash the trading operation was generating.
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