Enron Corp shares and bonds fell for a third day on concern the company's weakened financial condition and plunging stock price may lead Dynegy Inc to try to cancel or rework a takeover of the biggest energy trader.
Shares of Enron, the most-active US stock, fell US$0.33, or 6.6 percent, to US$4.68 on Friday. They fell 45 percent Tuesday and Wednesday after Enron said it may have to pay more than US$9 billion in debt due by 2003. Enron 6.4 percent bonds due in July 2006 were bid at US$0.55 on the dollar, down from US$0.62 on Wednesday, traders said.
Enron shares are trading at less than half the value of Dynegy's offer, which shows investors are questioning whether the buyout will be completed on the terms agreed to two weeks ago.
Enron's financial problems may prove to be a drag on Dynegy's earnings next year if the transaction is completed, analysts said.
"There are continued doubts about the deal," said UBS Warburg analyst Ronald Barone, who rates Dynegy a "strong buy" and doesn't own shares in either company. "Enron's earnings aren't what they used to be because they've lost trading business.
Given that, Dynegy has an opportunity to renegotiate the price."
Enron agreed Nov. 9 to the takeover, now valued at about US$23 billion in stock and assumed debt, after a financial crisis threatened it with bankruptcy.
On Wednesday, Enron got a three-week reprieve from lenders on a US$690 million note due next week, giving the company more time to restructure its finances. Dynegy Chief Executive Officer Chuck Watson said he was ``encouraged'' by the commitment to extend the note payment, as well as the closing of a US$450 million credit facility, and that Dynegy remained committed to the merger.
More than 40 million Enron shares changed hands today, almost twice their three-month daily average, in a session shortened by the Thanksgiving holiday. Enron was the most-active US stock on Wednesday, with 116 million shares traded. Dynegy shares rose US$0.64 to US$40.40 on Friday.
In a Securities & Exchange Commission filing Monday, Enron said that it has less than US$2 billion in cash and credit lines left. If the company's cash reserves run too low, Enron is in danger of seeing its credit rating cut below investment grade.
That would trigger US$3.9 billion in debt repayments for two affiliated partnerships.
Enron's bankers have met with unidentified investors, including leveraged buyout firms and two industrial companies, in a bid to shore up the energy trader's finances with an injection of as much as US$2 billion, the New York Times reported yesterday, citing unidentified executives close to the companies.
Enron spokeswoman Karen Denne said the company is seeking US$500 million to US$1 billion. Enron needs to raise US$1 billion to US$1.5 billion in cash within the next 45 days, said Sean Egan, managing director of Egan-Jones Rating Co.
"Their trading operation has burned through cash faster than the market had expected," Egan said.
Traders including Mirant Corp and Aquila Inc have said they shifted transactions away from Enron after its plunging stock price prompted concerns about creditworthiness. Enron has said fourth-quarter earnings would be reduced partly by a drop in its energy-trading business.
Watson said after the Enron buyout was announced he expected it to increase earnings for next year by 35 percent. Analysts said that can't happen unless Enron recovers lost trading business. Several have cut their 2002 estimates for Enron. The average estimate of analysts polled by Thomson Financial/First Call for next year is now US$1.68 a share, down from US$2.14 a month ago.
Dynegy can cancel or renegotiate if Enron can't meet debt payments, its trading market collapses, banks demand more collateral or raise the interest rate for loans, Enron's credit rating is cut to junk, the SEC cites Enron for securities fraud, or if Enron's legal liabilities including shareholder suits exceed US$3.5 billion, Egan said.
Dynegy officials were considering whether to try and renegotiate terms of its agreement with Enron, according to the
"Dynegy investors would like to see the company negotiate a lower price for Enron," said Credit Lyonnais securities analyst Gordon Howald, who rates Dynegy "buy" and owns no shares.
Under the Nov. 9 terms, Enron investors would receive 0.2685 Dynegy share for each share held. At today's closing price, that values Enron stock at US$10.85. A year ago, Enron stock traded at almost US$80.
Investors worry that a cancellation of the merger would push Enron into bankruptcy.
"The market is saying there seems to be no obvious Plan B for Enron and that is what has investors concerned," said Eric Bergson, who helps manage US$9 billion of fixed-income assets at Northern Trust Co in Chicago. "The lower bond prices go, what the market is saying is that there's less chance of this deal going through."
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