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USA: Enron, Dynegy Confirm Possible Merger Talks

by Jeff FranksReuters
November 8th, 2001

HOUSTON -- Enron Corp., plagued by investor doubts and under the gun to shore up its crumbling finances, said on Thursday it was talking with power trading rival Dynegy Inc. about a possible merger.

The company, whose stock and credit ratings have plummeted amid an uproar about questionable business transactions, admitted it made bookkeeping errors and restated earnings for the last four years.

It also said former Chief Financial Officer Andrew Fastow, who abruptly left the company last month, had made $30 million managing partnerships linked to the deals. The deals, which were off the balance sheet, are now under investigation by the U.S. Securities and Exchange Commission for possible conflict of interest.

Two other executives, managing director and treasurer Ben Glisan and Enron division general counsel Kristina Mordaunt, were both believed to have links to the Fastow-led partnerships and have been fired, the company disclosed.

The announcements threw a spotlight on Enron's stark situation, in which the nation's top energy trader has gone from Wall Street darling to pariah in a few weeks and now faces a cash crunch so dire it is seeking a merger with the much-smaller Dynegy.

Its credit ratings have fallen to near-junk levels in recent weeks, making it difficult to get money to boost investor confidence and back the trading operations that provide 90 percent of Enron's income. The company reportedly has been seeking investors to provide a cash infusion for an equity stake.


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Word about a possible Dynegy-Enron deal leaked out on Wednesday, and on Thursday the two companies confirmed talks about a possible ''business combination'' were underway, but said no agreement had been reached.

Sources told Reuters that the two Texas rivals, whose headquarters are a few blocks apart in downtown Houston, were talking about a stock swap with a moderate premium for shareholders and a $1.5 billion capital infusion from ChevronTexaco Corp., which owns 26.5 percent of Dynegy.

The stock swap is valued at about $8 billion, or about $10 a share, The New York Times reported on Thursday.

A merger would catapult Dynegy to the top of the energy trading industry now dominated by Enron. Last year, the company had $29 billion in revenues, compared to $100 billion for Enron.

For Enron, it would cap an astonishingly rapid fall from grace.

Enron stock has lost $19 billion in market value since its crisis began in mid-October and was down another 45 cents to $8.60 in Thursday trading. Dynegy shares rose $3.87 to $36.87.

Enron restated its earnings going back to 1997, saying its auditors advised that the off-the-balance sheet deals in question should have been included in the company's financial statements.

The restated results reduced Enron's net income by $591 million, or 22 percent, from 1997 to 2000, and increased its debt by $628 million, or 6 percent, after two of the partnership's financial statements were consolidated into Enron's earnings.

Enron said the restatement reflects a $1.2 billion reduction to shareholders' equity that touched off the current controversy when the company offhandedly disclosed it last month. Angry shareholders suddenly worried that Enron was hiding other liabilities in its complex financial statements and began demanding more information.

In a statement, Enron chief executive Ken Lay said the company hoped it had allayed Wall Street fears with Thursday's announcements.

''We believe that the information we have made available addresses a number of the concerns that have been raised by our shareholders and the SEC about these matters,'' he said.

Analysts, wary after last month's surprise revelations, said Enron may have more to release, but they were pleased it was finally coming forth with information.

''It's an attempt to come clean,'' said Raymond Moore, an analyst with Weatherly Securities.





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