Enron Corp's sale of a controlling interest in its dormant trading unit to UBS AG was approved by a US bankruptcy judge after a daylong hearing.
US Bankruptcy Judge Arthur Gonzalez gave the go-ahead to revive Enron's trading operation, a unit described by company lawyers as Enron's "most critical and valuable business." The unit may be worth US$1 billion to US$2 billion to Enron over several years, Steven Zelin, a senior managing director of the Blackstone Group LP, said at the hearing.
Gonzalez said there are "compelling circumstances" for completing the deal. The transaction, the judge said, is "the only mechanism for obtaining value from the wholesale trading business."
UBS won a bankruptcy auction for the trading business last week, offering to pay Enron out of future profits, rather than provide any cash up front. Enron, at its peak the seventh-largest US corporation, filed the biggest bankruptcy in history on Dec. 2. The Houston-based company hopes to team with UBS to salvage a trading business that was once the industry leader.
"We think this is the best resolution for creditors and all stakeholders," said Jeffrey McMahon, Enron's chief financial officer. "We surely believe that this trading operation with UBS' balance sheet will be highly successful in the future. This is the first big step in the reorganization of Enron under Chapter 11."
McMahon didn't say when the trading operation will resume.
UBS attorney Susan Johnston declined to comment afterwards.
Earlier in court, Johnston said "it's certainly in our interest to make this business a great success. We want it to work."
Creditors who objected to the acquisition said Enron would incur most of the cost and the risk of the new operation, while UBS, the biggest Swiss bank, could walk away with 30 days notice.
"What we're doing is gambling Enron North America's money on a start-up business," said David Bennett, a Dallas bankruptcy lawyer representing a group of creditors that opposed the UBS deal. "You can't know that even one customer will do business with the Enron enterprise, can you?"
Bennett, a partner at Thompson & Knight LLP, is an attorney for about 20 creditors, most of them Texas-based oil and gas exploration and production companies collectively referred to by the court as the "Dunhill Group." The group is informally named for one of the companies, Dunhill Resources I LLC, a Houston firm that sold gas to Enron. Nine of the Dunhill creditors joined to oppose the UBS acquisition.
In their formal objection filed with Gonzalez, they contended that Enron "will bear a disproportionate share of the cost and risk" of the new business with UBS. The transaction would "accelerate the depletion" of Enron's estate, the Dunhill creditors claim. The deal allows UBS to license Enron's intellectual property, lease its real estate and hire company employees to run the new trading operation. UBS won't assume any of Enron's debts, which exceed US$40 billion. The transaction doesn't include pending commodity trades and derivative contracts that Enron entered into before filing for Chapter 11 protection.
The company, which said the value of the trading book was more than US$7 billion at the time of the bankruptcy filing, now says there are more than 700 open position in Enron's trading book worth about US$1.3 billion. Enron is trying to settle the commodity and derivative contracts to help pay creditors.
David DeRosa, president of DeRosa Research & Trading, testified on behalf of another group of former Enron trading partners that are now among its creditors. He said Enron's current positions in commodities markets may be at risk if its entire trading desk joins the new, UBS-controlled entity, to be known as "Netco," an acronym for New Energy Trading Co.
The positions in Enron's trading book are "highly proprietary" and the traders' knowledge of those positions could give them an advantage, he said. "The creation of this Netco, the removal of confidentiality, will create a perfect predatory trading machine," DeRosa told the judge.
Johnston, UBS's attorney, told the judge that UBS would try to prevent traders from trading based on their knowledge of Enron positions.
"The court has a sufficient degree of confidence that Enron's book of business will not be diminished by the transaction," Gonzalez said.
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