Independent power producer Dynegy Inc. said on Friday it will pay over $2 billion for the power plants of private equity fund LS Power Group, fulfilling a long-time goal to expand its generating fleet.
The deal, under which LS Power receives 40 percent stake in Dynegy, will increase the company’s cash flow and help shore up its balance sheet, said Dynegy, whose shares rose as much as 8.7 percent in early trading.
The transaction also represents a bet that the sector will see further gains in demand.
Under the terms of the deal, LS Power will receive 340 million shares of Dynegy common stock, worth about $1.96 billion based on Thursday’s closing share price, $100 million in cash and a $275 million note. Dynegy will also assume about $1.8 billion of LS Power’s debt.
Dynegy would have more than 20,000 megawatts of generating capacity from 31 power plants in 15 states. LS Power is contributing about 8,300 megawatts, which it said is predominately contracted.
The deal “fits what we need to do as a company — to build greater scale and scope, and strengthen our geographic presence in growing markets with high barriers to entry such as California and the Northeast, while diversifying and complementing our position in the Midwest,” Dynegy Chief Executive Bruce Williamson said on a conference call with investors.
Dynegy said it will also buy a 50 percent stake in a development joint venture with LS Power which will have a pipeline of nine projects in development, or more than 7,600 megawatts.
Shares of Dynegy rose 41 cents, or 7 percent, to $6.17 in morning trading on the New York Stock Exchange after reaching as high as $6.25 earlier in the session.
Wholesale power producers, whose power plants are not subject to government pricing rules, have become more attractive acquisition targets as the sector slowly emerges from a credit crunch in late 2001.
Earlier this year, wholesale power company Mirant Corp. (MIR.N) tried to buy its competitor NRG Energy Inc. (NRG.N) before backing off under shareholder pressure.
James Halloran, analyst at National City Private Client Group, said the deal was positive for Dynegy, but would not propel them into the upper ranks of the industry in size. “I think it’s a way to make themselves look more efficient,” Halloran said.
Dynegy has long sought to expand its business. In an interview with Reuters over a year ago Williamson said that 10,000 to 15,000 megawatts was an unsustainable size for an independent power company and that 40,000 megawatts is needed for a company to compete and grow.
Dynegy is buying 11 power plants from LS Power, nine of which were acquired by the private equity group from Duke Energy Corp. for about $1.6 billion in May. In addition to the development joint venture with Dynegy, LS Power will continue to exist and invest as a private equity firm.
The Dynegy deal marks the first time LS Power has ever accepted a stock consideration from any company, and the private equity groups Chief Executive Mike Segal said he viewed the stake as a long-term investment.
Both Segal and Dynegy’s Williamson noted that the new company would be positioned to take part in further consolidation within the wholesale power industry.
“It will become a resource-balanced, operationally efficient, and financially strong company,” Segal said on the call with investors. “As such, it will have an ability to be either a consolidator or a very attractive target for other consolidators. I’m very confident that it will be opportunistic and focused on delivering value to its shareholders.”
Chevron, Dynegy’s largest shareholder with 97 million shares, has agreed to the transaction, the companies said. Its stake in Dynegy will fall due to the increased number of outstanding shares and its members of Dynegy’s board will step down.
