Seneca Capital

Icahn's no good, very bad Dynegy deal

December 16, 2010: 12:20 PM ET

Longtime corporate raider Carl Icahn beat out Blackstone's bid for Dynegy, but it's not clear how he can make a return on his investment.

By Cyrus Sanati, contributor

Carl Icahn

Why is this man smiling?

Carl Icahn may be biting off a bit more than he can chew with his latest deal.

The billionaire activist investor jumped head first into the volatile energy industry yesterday, agreeing to buy wounded Houston-based power giant Dynegy for $660 million, plus the assumption of $4.8 billion in debt. At that price, Icahn has two options: he can be very patient, waiting for asset prices to rebound, or very aggressive, declaring war on the company's bondholders, to recoup his investment. Neither one is promising.

Dynegy (DYN) had been on the block for nearly two years. Its bankers at Goldman Sachs (GS) and Greenhill (GNH) pitched the company to anyone who would listen, but failed to seal a deal as investors were concerned about the company's crushing debt load. Then in August, private equity giant Blackstone Group (BX) came along and offered $4.50 a share for the company, or $550 million.

Dynegy was in bad shape at that point. It had been burning cash for a while as weak natural gas prices helped to drag down power prices. Blackstone looked at Dynegy as a long-term play with an investment time horizon of at least five years to around 10 years, a person with knowledge of the firm's thinking told Fortune. It had already sealed a deal to sell some of the company's best power plants in California and Maine to rival NRG (NRG) for $1.36 billion. Blackstone was planning to use that cash to keep the company afloat until power prices rebounded for a sustained period of time. It would then either take the company public or sell it off in pieces.

But Icahn and Seneca Capital, a hedge fund, fought to block the deal on grounds that it undervalued the company. Blackstone later upped its offer to $5 a share, but shareholders rejected the deal last month, threatening to put the company into bankruptcy. More

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