Energy marketer Dynegy Inc. announced Friday that it will buy its much larger rival, the once mighty but now troubled Enron Corp., for $7.8-billion in stock. Dynegy also will assume a hefty $15-billion in Enron debt.
The announcement came after Enron's stock price plummeted about 80 percent over the past three weeks because of concerns that the company wasn't revealing serious financial problems to shareholders.
Under the deal, ChevronTexaco Corp., which owns more than a quarter of Dynegy, would quickly provide about $1.5-billion. ChevronTexaco also would contribute an additional $1-billion upon completion of the deal.
"With its market-making capabilities, earnings power and proven strategic approach to wholesale markets, Enron is the ideal strategic partner for Dynegy," Dynegy chairman and chief executive Chuck Watson said in announcing the purchase.
Watson made it clear that he would not tolerate the sort of financial practices that prompted explosive disclosures by Enron this week _ including an admission that more than half a billion dollars in debt had been kept off the company's books.
"As a combined company, we will focus on leveraging our core skill sets and, as always, we will keep a strong balance sheet and straightforward financial structure as key priorities," Watson said.
At a news conference, Watson said company officials who negotiated the deal came away convinced that Enron was worth buying despite its recent troubles.
"We looked under the hood and, guess what, it's just as strong as it ever was," Watson said.
Under the terms of the deal, Enron shareholders will receive 0.2685 Dynegy share for each share of Enron common stock, valuing each share at $10.41.
That represents a 21 percent premium above Enron's closing price of $8.63 Friday on the New York Stock Exchange _ but it's still just a fraction of the 52-week high of $84.87. Dynegy's shares climbed $2.26, or 6 percent, to close at $38.76 on the NYSE.
In after hours trading on the NYSE, Enron shares shot up 15.6 percent, or $1.35, to $9.98. Dynegy shares were unchanged.
Dynegy's stockholders will own about 64 percent of the new company, with Enron's stockholders holding the remainder.
The boards of both companies have unanimously approved the transaction, which is expected to close next summer. The deal is expected to save the combined company between $400-million and $500-million annually because of continued elimination of "non-core" Enron holdings and lower costs.
Watson will remain as chairman and chief executive of the combined company, which will retain the Dynegy Inc. name.
Enron chairman and chief executive Kenneth L. Lay will no longer have a role in day-to-day management of the company, but he has been offered a seat on the combined company's board and will help with the merger.
Dynegy said that Greg Whalley, the current president and chief operating officer of Enron, will become an executive vice president of the new Dynegy. He said the merger sets the best course for Enron.
The merger was announced a day after Enron acknowledged it overstated earnings by about 20 percent over the past four years and kept large amounts of debt off its balance sheets through business partnerships now under investigation by the Securities and Exchange Commission.
Analysts said the merger rescues Enron but leaves Dynegy in uncharted territory _ with the outcome of the SEC investigation completely unknown. "There is still a shroud hanging over Enron that now moves over to Dynegy," said Carol Coale, an analyst with Prudential Securities.
Early Friday, Moody's Investors Service downgraded Enron's debt ratings to one level above junk bond status.