Friday, October 2, 2009

NRG + Dynegy? A big maybe (DYN; NRG)

From the Houston Chronicle:
After surviving a hostile takeover bid from Exelon earlier this year, power plant operator NRG Energy may be on prowl for some takeover targets of its own, including Houston's own Dynegy.

The reports on this are highly speculative (and the companies don't comment on speculation) but there's been an up tick in trading activity for Dynegy stock in reaction. Analysts have weighed in on the possibility, and say an NRG/Dynegy deal isn't out of the question.

Stocks for independent power producers (i.e. companies that aren't utilities like CPS Energy in San Antonio or ComEd in New York) are at exceptionally low levels, so "the sector is ripe for consolidation," notes Gimme Credit analyst Carl Blake. NRG seems to be performing well despite the economic downturn, but could benefit from having greater capacity that would come through a Dynegy acquisition.

Good points to a NRG/DYN combo? Bigger is better: NRG's 24 gigawatts plus Dynegy's 17.7 gigawatts breaks them out of the pack of mid-sized producers and into the next league. There's also little geographic overlap between the companies' fleets (about 15 percent), so there would be diverse markets served and minimal anti-trust issues.

Downsides, according to Blake? Acquiring Dynegy would put a bit of strain on NRG's balance sheet, even if it were a stock deal, because Dynegy is highly leveraged. And Dynegy's fleet is pretty heavily weighted toward coal-fired power, which may not be the best place to be if climate change laws that put a heavy price on carbon dioxide are adopted.

"Furthermore, such an acquisition would be inconsistent with NRG's recent efforts, which have been on the development of nuclear power facilities and alternative energy sources, such as solar and wind power."

J.P. Morgan analysts Andrew Smith and Stefka Gerova say in a recent report they believe Dynegy is a possible target too, particularly since it's been greatly undervalued....MORE