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Dynegy scraps Enron deal
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November 28, 2001: 5:27 p.m. ET
Collapse of $9B deal could push Enron into bankruptcy, analysts say.
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NEW YORK (CNN/Money) - Dynegy Inc. scrapped its proposed $9 billion merger with Enron Corp. Wednesday, a move that leaves what had been one of the nation's biggest and most influential companies teetering on the edge of bankruptcy.
The collapse of the deal came after Standard & Poor's, one of the nation's leading credit-rating agencies, said it cut Enron's debt to "junk bond" status because of worries that Enron might be forced into bankruptcy - the latest blow to a company that had helped reshape the nation's energy markets by using cutting-edge computer and Internet technology.
As recently as Tuesday, both companies said they were trying to renegotiate their deal, but Dynegy Chief Executive Chuck Watson said Wednesday that his company was forced to walk away, citing breach of contract and a "material adverse change" in the deal.
"Under the present circumstances we feel we had no choice but to act to protect our shareholder interest," he told analysts in a conference call.
The end of the merger marks a stunning reversal for Enron (ENE: Research, Estimates), once the nation's largest energy trading company, whose stock has lost nearly all its value over the last year as its problems mounted.
Enron (ENE: Research, Estimates) shares plunged $3.50 to 61 cents a share Wednesday, a far cry from their peak of $90.56 in August 2000. With more than 181 million shares traded, Enron smashed the one-day record for trading on the New York Stock Exchange.
Dynegy (DYN: Research, Estimates) shares lost 12 percent of their value, dropping $4.92 to $35.97.
Analysts said the dire situation left Enron - ranked No. 7 on last year's Fortune 500 - facing almost certain bankruptcy.
"It's the end of Enron, no question about it," Gordon Howald, an analyst at Credit Lyonnais Securities in New York, told the Associated Press. "I don't know who else could step in."
Enron told CNN/Money.com it had not filed bankruptcy but was exploring its options. Enron suspended payment of some debt and its executives were "evaluating and exploring other options to protect our core energy businesses," CEO Kenneth Lay said.
Enron also said it was forming a "litigation committee" to study the lawsuits filed against it by shareholders after a series of disclosures of irregularities in its finances, including the admission that it erred on financial statements and had to lower its earnings reported since 1997 by almost $600 million.
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Todd Shipman of Standard & Poor's explains why his company cut Enron's debt to "junk" status.
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After S&P cut its debt rating, the two other major rating agencies, Fitch and Moody's Investors Service, quickly followed suit.
The loss of investment-grade status forces about $3.9 billion in debts to come due immediately, a major problem for a company that has spent most of the $5.5 billion it raised in recent weeks to stay afloat.
That's quite a change of circumstance for Enron, which was the 12th-biggest contributor to the presidential campaign of President Bush, according to opensecrets.org, which tracks political contributions.
Robert Stovall, senior strategist at Prudential Securities, said after nearly 50 years of working on Wall Street, he could not recall any previous corporate unravelling like that of Enron.
"You would have to go to pre-SEC days for that," he told Reuters, referring to the creation of the Securities and Exchange Commission in the aftermath of the stock-market crash of 1929.
Dynegy and Enron, both based in Houston, were also among the energy companies blamed for bringing about the California energy crisis. Dynegy was among five companies named in a lawsuit filed in May by Lt. Gov. Cruz Bustamante alleging energy price manipulation at several southern California power plants it owns. Dynegy has denied the accusation.
Still, Enron's energy trading business revolutionized the industry, and the company's ability to take advantage of the late-1990s technology boom and move its trading business online helped boost its stock to its peak a year ago. Until recently, Enron handled a fifth of all U.S. natural gas and electricity trade.
Enron's woes started after regulators began an investigation of transactions with a partnership created by its former chief financial officer, Andrew Fastow, that resulted in a $1.2 billion reduction in the value of investors' holdings.
It became increasingly clear, as Dynegy sought to renegotiate the merger, that Enron's complex and often indecipherable finances were becoming a sticking point, sources close to the negotiations told Reuters.
"Sometimes a company's best deals are the ones they didn't do," Watson said on the conference call Wednesday. "We have never been willing to risk our franchise, our credit or our credibility. We know when to say no, and this morning we said no."
As its stock started sinking and more questions mounted about its finances, Enron began searching for cash, and other companies in the energy trading business became worried about doing business with it.
"As of this morning, we are no longer trading with Enron unless Enron puts up sufficient credit to support its continued trading," Dynegy Chief Operating Officer Steve Bergstrom said on the conference call. Dynegy still has a $75 million exposure to Enron, he added.
Enron said there was a break-up fee for the Dynegy deal of $350 million, but it had not decided if Dynegy would have to pay the fee. Litigation could also follow the break-up.
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Enron, which employs about 20,000 people globally, also said it could end up cutting jobs, but it would tell its employees about job cuts first.
Enron said it will retain the employees necessary for its continuing operations, but its core energy trading business was shut down Wednesday afternoon, according to employees and other traders.
Several other energy companies, including El Paso Corp. (EPG: Research, Estimates), rushed Wednesday to distance themselves from Enron's implosion, saying they had drastically reduced or eliminated trading with the company. 
-- from staff and wire reports
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