NRG + Dynegy? A big maybe

After surviving a hostile takeover bid from Exelon earlier this year, power plant operator NRG Energy may be on prowl for some takeover targets of its own, including Houston’s own Dynegy.

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Is NRG CEO David Crane getting ready to shop?

The reports on this are highly speculative (and the companies don’t comment on speculation) but there’s been an up tick in trading activity for Dynegy stock in reaction. Analysts have weighed in on the possibility, and say an NRG/Dynegy deal isn’t out of the question.
Stocks for independent power producers (i.e. companies that aren’t utilities like CPS Energy in San Antonio or ComEd in New York) are at exceptionally low levels, so “the sector is ripe for consolidation,” notes Gimme Credit analyst Carl Blake. NRG seems to be performing well despite the economic downturn, but could benefit from having greater capacity that would come through a Dynegy acquisition.
Good points to a NRG/DYN combo? Bigger is better: NRG’s 24 gigawatts plus Dynegy’s 17.7 gigawatts breaks them out of the pack of mid-sized producers and into the next league. There’s also little geographic overlap between the companies’ fleets (about 15 percent), so there would be diverse markets served and minimal anti-trust issues.
Downsides, according to Blake? Acquiring Dynegy would put a bit of strain on NRG’s balance sheet, even if it were a stock deal, because Dynegy is highly leveraged. And Dynegy’s fleet is pretty heavily weighted toward coal-fired power, which may not be the best place to be if climate change laws that put a heavy price on carbon dioxide are adopted.

“Furthermore, such an acquisition would be inconsistent with NRG’s recent efforts, which have been on the development of nuclear power facilities and alternative energy sources, such as solar and wind power.”

J.P. Morgan analysts Andrew Smith and Stefka Gerova say in a recent report they believe Dynegy is a possible target too, particularly since it’s been greatly undervalued.
Their upsides to the deal? Dynegy recently ended its partnership LS Power, whose private equity stake in some ways was a poison pill to a merger. Both companies will be in good cash positions at the end of the third quarter too, with NRG having about $3 billion and Dynegy about $2 billion.

“Furthermore, we believe that Dynegy’s CEO (Bruce Williamson) has steadfastly been the most vocal CEO in the IPP industry to indicate that he would be a seller at the right price and would have no problems executing a transaction,” Smith and Gerova say in the report.

The greenhouse gas issues that Dynegy’s heavier use of coal isn’t so much of an issue for the J.P. Morgan analysts, however. They don’t think the new laws will significantly devalue coal fired power, “at least not for a number of years.” And while much of Dynegy’s earnings current come from coal power, 60 percent of its generating capacity is natural gas fired, which would fair well under a carbon cap.
But Blake’s final though on NRG buying Dynegy? There’s a chance but “…we don’t think management will pay up or jeopardize its balance sheet (which it has dutifully protected since its emergence from bankruptcy in 2003) to get a deal done. Dynegy may be at the top of NRG’s list, but we think NRG has alternatives.”
Like who? Atlanta-based Mirant for one, or even another Houston company, Calpine. NRG made a bid for Calpine last year, but it didn’t seem like their heart was really in it. It’s interesting to note the guy who was head of NRG Texas at the time, Thad Hill, is now Chief Commercial Officer at Calpine.

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