Rick Perry’s Plan Looks DOA But Could Spark a Dynegy Deal
The intellectual rigor underpinning Energy Secretary Rick Perry’s proposed subsidy for coal-fired and nuclear power plants was captured best in the response given last week by the ‘Dancing With The Stars’ alumnus to a congressman’s question about the plan’s projected cost:
What’s the cost of freedom? What does it cost to build a system to keep America free?
When it comes to M&A, though, intellectual rigor is only part of the equation; tactics and plain old second-guessing are equally important. So even if Perry’s black-lungs-matter plan ultimately doesn’t fly, it may yet help tip the balance in the most talked-about potential deal in the power sector: Vistra Energy Corp. buying Dynegy Inc.
This tie-up has been rumored since the spring (I wrote about in April). And the takeout of fellow generator Calpine Corp., announced in August added fuel to the fire. Curt Morgan, Vistra’s CEO, has also dropped hints, such as this one from the company’s latest earnings call:
The other thing, I think, that’s very important is that the synergies that I think exist and we think exist in a larger-scale deal, as there are scale economies especially around corporate center and support costs; those could be quite substantial.
And yet buying Dynegy has never felt like a no-brainer for Vistra. On that same earnings call, Morgan also floated the possibility of doing a large share buyback instead — although touting alternatives would also be a good way of blowing some of the merger froth from Dynegy’s stock price (tactics, folks).
Buying The Rumor
Dynegy’s stock was pulled out of a tail-spin by reports of a pending deal with Vistra
There are two main reasons for buying Dynegy. First, while Texas is probably the best power market in the U.S., Vistra might like to not have all its eggs in one Texan basket. Buying Dynegy would give it a substantial position in the PJM market, which covers a broad swath of mid-Atlantic and Midwestern states.
Second, the potential for synergies looks reasonable. Taking out half of Dynegy’s overhead and 10 percent of its operations and maintenance costs adds up to about $180 million a year. Its carried losses would likely provide a tax shield worth perhaps another $100 million or so a year. On a multiple of 7.5 times — Vistra trades at 8.3 times 2018 Ebitda — that equates to $2.1 billion of potential value. Meanwhile, even with a 20 percent takeover premium, Dynegy’s valuation would be less than $1.5 billion.