Don’t Expect Blackstone/Dynegy Copycats

(Reuters) – Blackstone Group LP’s (BX.N) deal to buy Dynegy Inc (DYN.N) is an unusually structured buyout that would give it control of the power company without having to refinance or invest much cash and similar takeovers of independent power companies are unlikely to follow.

A key factor in the deal is that a substantial amount of Dynegy’s debt is bonds that do not have change of control provisions, a source familiar with the situation said.

“This is what you call a prepackaged leveraged buyout,” said an M&A lawyer who spoke on condition of anonymity. “(Blackstone) gets to do a deal and they don’t have to go and find leverage — and you probably couldn’t get leverage at these levels and at these terms in this market.”

Crucially, Dynegy is the only independent power producer without change of control covenants in a majority of its debt, said CreditSights analyst Andy DeVries wrote in a research note.

The lack of a change of control provision means that Blackstone does not have to refinance Dynegy’s debt.

In a typical leveraged buyout, the private equity buyers refinance the debt and the buyers inject at least 30 percent equity. Blackstone’s equity stake in the deal is low by historic standards.

The fact other power firms are not structured with change of control covenants makes the possibility of more deals less likely, said an analyst at CreditSights.

“We view the refinancing requirements of these covenants as a significant obstacle to additional corporate level M&A,” CreditSights said.

Other independent power companies include RRI Energy Inc (RRI.N), Mirant Corp (MIR.N) and Calpine Corp (CPN.N). All those companies’ shares were higher on Friday.

Blackstone’s deal values Dynegy’s shares at $4.50 each, or $543 million in cash for the equity. But including debt, the deal is valued at $4.7 billion.

The private equity firm also clinched a $1.3 billion deal to sell some of the company’s best assets to NRG Energy Inc (NRG.N) in the latest shake-up in the electricity industry.

CreditSights said because of these factors, not only is Blackstone not required to put any money into the deal, they could actually get around $800 million back once the deals close.

But a source familiar with the matter said that, after NRG acquires the Dynegy assets, that money stays on Dynegy’s balance sheet rather than going to Blackstone.

CreditSights’ DeVries wrote that he thought it was unlikely Blackstone would add debt to Dynegy.

“We think it is more likely Blackstone rides out the investment at least until environmental spending starts declining …,” he wrote.

Independent power producers, who sell electricity at competitive rates into the wholesale market, have struggled as weak demand and lower natural gas prices have resulted in lower electricity rates.

High natural gas prices result in high electricity prices and wide margins for companies that reap a significant portion of their earnings from coal-fired power plants, such as Dynegy. But natural gas prices have settled at around $4 per million British thermal units in 2010, down from recent highs of more than $13 per mmBtu in 2008.

Still, if gas prices rise, Blackstone is seen making a huge profit.

“This is a highly leveraged company with a bunch of leverage in place and, if things turn around and gas prices go up, Blackstone makes a killing,” said the lawyer.

GO SHOP

The deal includes a ‘go-shop’ provision for 40 days when Dynegy can solicit other offers. However, there are no obvious alternative bidders, said analysts at UBS bank.

“We believe shareholders will gladly accept the bid and do not believe shares should trade at a premium given the lack of obvious alternative bidders,” UBS said in a research note.

Dynegy has long sought to merge with a peer, and has long been rumored to be a takeout target, but weak market conditions made completing a deal difficult.

Private equity firm LS Power picked up a 40 percent stake in Dynegy and started a power development company with the company in 2007. The firm had the opportunity under its deal to buy the rest of Dynegy, but it walked away from the collaboration and returned most of its stock last year instead.

“The company’s been on the market for the last 8 years or so. They’ve already been shopped (around) for a very long time,” said one investment banker. “I’d be very surprised if anyone else comes in and sees this as a hidden gem.”