Dan Primack

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Icahn has more than one interest in Dynegy dispute

November 12, 2010: 3:26 PM ET

Carl Icahn is back in the headlines today, after announcing that he will oppose The Blackstone Group's proposed $4.7 billion acquisition of troubled power company Dynegy (DYN).

Actually, Icahn did more than just tip his ballot box strategy. He also promised the company a $2 billion line of credit (sans terms), to counter management claims that Blackstone is all that stands between Dynegy and a massive liquidity crisis. And if that wasn't enough, he also suggested that he would exercise options to push his ownership stake past 12 percent. He wouldn't be able to vote the new shares against Blackstone, but could use them to support a proxy fight being threatened by Seneca Capital.

As always, the issue here is value. Blackstone only would pay around $543 million to buy Dynegy, and then plans to turn around and sell four of the company's power plants to NRG Energy (NRG) for $1.36 billion. Do a little third-grade math, and you realize that Blackstone could pocket a 50% profit on day one. Or it could repay its principal (i.e., buy Dynegy "for free"), while also boosting the company's balance sheet by over $800 million.

(More practical scenario: Blackstone uses $1.36b to help fund expected -$1.9b free cash flow over next 4 yrs, and then either pumps in some extra cash or sells one of Dynegy's own assets).

Opponents of the Blackstone deal have argued that Dynegy should just sell the plants to NRG directly, thus cutting out the middle man. Dynegy management has ruled out this possibility for a variety of reasons, including some that Icahn is trying to offset via his credit agreements (again -- we don't know what Icahn wants in return).

But here's one thing I haven't seen mentioned yet today: Icahn also owns a significant piece of NRG Energy. More specifically, he owns around a 1.37% stake, or more than 2.3 million shares valued at over $50 million. That's just slightly less than what Icahn has invested in Dynegy (before the options get exercised), which means he's kind of playing both sides here.

NRG obviously wants the power plant deal to go through, since it represents around a 20% discount to current NAV (and perhaps up to a 50% discount to projected NAV in 5-10 years). But such a deal would be virtually impossible without Blackstone, since Icahn's $2 billion pledge would alleviate Dynegy's liquidity needs (and since no alternate bidder emerged during the "go shop" period).

So one has to wonder what NRG thinks about its own shareholder leading an effort to scuttle a major acquisition. Best guess is that it isn't too thrilled, particularly considering that NRG shares have lost more than 2.5% on the day (although, to be fair, the whole sector was off).

As for Icahn, it seems clear that he believes more in Dynegy's future than in that of NRG. As one energy analyst explained it: "He probably views Dynegy as a 10-bagger, and NRG as more of a 3-bagger."

****

And, in just an added note of incestuousness, Blackstone once held nearly twice as many NRG Energy shares as Icahn owns today. They were granted as part of the price NRG paid for its 2006 acquisition of Texas Genco. NRG repurchased the shares later that same year, for around $232 million (or $55 per share, compared to today's opening price of $20.07 per share).

Actually, here's one more: NRG happens to be one of the few (perhaps only?) stock held by both Icahn and Warren Buffett (who holds a 2.37% stake). Buffett has been on a rhetorical tear against private equity lately, and it's been Blackstone Group that seems to have taken the most offense. Just yesterday, Blackstone exec David Blitzer told a London crowd that Buffett's criticism "has an agenda as relates to buying assets and he's running around competing with us, so I'd take a little bit of a grain of salt."

[Update: Seems that while Berkshire Hathaway does own the NRG stake, the actual investment was made by BH's Lou Simpson, not Warren Buffet).

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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