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Enron could give surprises
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November 12, 2001: 2:18 p.m. ET
Analysts question whether Dynegy had time to do adequate due diligence on Enron
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NEW YORK (CNN/Money) - Executives of Dynegy Inc. maintained Monday that they have seen most of the downside to Enron Corp. while analysts questioned whether Dynegy could have conducted adequate due diligence in such a short time.
Dynegy CEO Chuck Watson said on a conference call Monday that the $9.5 billion takeover of larger rival Enron would have "nothing but upside," he said.
Dynegy also expects the Enron merger to boost its earnings in the first year and thereafter. The combined company will grow by 15 to 20 percent for the next three years, Watson said.
Shares of Houston-based Enron (ENE: up $0.89 to $9.52, Research, Estimates) soared Monday by more than 11 percent while Dynegy (DYN: up $5.87 to $44.63, Research, Estimates) surged more than 15 percent.
But some analysts and insiders questioned whether Dynegy could have actually conducted thorough due diligence of Enron's financials in two weeks.
"My biggest concern is how credible is the Enron quotient to accretion," said analyst Carol Coale, of Prudential Securities Inc. "We're not really clear what Enron's earnings really look like without the use of off balance sheet partnerships to earnings."
Enron is currently the subject of an investigation by the Securities and Exchange Commission (SEC) regarding its transactions with a partnership created by its former chief financial officer, Andrew Fastow, which resulted in a $1.2 billion reduction in shareholder equity.
Dynegy has looked at Enron's books and surprises could still be lurking, executives said. Last week, Enron restated its earnings for 1997 through the third quarter of 2001, slashing millions of dollars from most reporting periods to reflect retroactive accounting measures taken to address government and shareholder concerns. The company also fired its treasurer and general counsel.
"We are 90 percent sure we've seen all the downside on the Enron books but the investigation continues," Watson said Monday.
The Wall Street Journal reported that antitrust concerns could cause the merger to take months to complete. Enron (ENE: up $0.88 to $9.51, Research, Estimates) is the nation's largest trader of natural gas and electricity while Dynegy (DYN: up $5.87 to $44.63, Research, Estimates) is also a major energy trader.
The combined company would have 22,000 megawatts of generating capacity and 25,000 miles of natural gas pipelines, making it one of the largest providers in both categories, according to the report.
The Dynegy-Enron combination will likely not pass before third quarter 2002 since it combines two of the largest energy traders, said analyst Mike Heim of A.G. Edwards & Sons Inc.
However, regulators may speed passage of the deal to ensure liquidity in the market, Heim said.
Prudential's Coale does not foresee any major regulatory problems. Enron is the top marketer of both gas and power, on volume metric market share, in the U.S. while Dynegy is much smaller.
Dynegy could also experience a flight of personnel during the nine months the merger is being worked on, Coale said.
J.P. Morgan and Salomon Smith Barney, a unit of Citigroup, which are both advising Enron on the merger, are each considering investing $250 million in the combined company, a source familiar with the situation said.
"It's something that we had talked about and it ended up not happening," the source said. "It might still happen, it might not."
Dynegy can also back out of the deal if litigation claims exceed $3.5 billion or if there are general material adverse changes to Enron's assets, executives on the call confirmed.
Enron's sale followed a restating of past earnings and a number of write-offs of assets due to the company's dealings with private partnerships run by its own officers.
The Journal said the fact that about half of Enron's pretax earnings came from deals with those partnerships raises questions about the quality of its earnings and the potential for hundreds of millions of additional write-offs or restatements.
"Enron has taken several write offs and other ones are certainly possible," A.G. Edward's Heim said.
J.P. Morgan and Salomon Smith Barney, a unit of Citigroup, each declined comment. 
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