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. Last Updated: 07/27/2016

Can Dynegy Untangle Enron?

NEW YORK — Call it a $9 billion shotgun wedding.

Dynegy Inc., an energy marketer and trader based in Houston, took the biggest gamble in its corporate history Friday by agreeing to buy the Enron Corp., its much larger crosstown rival, for more than $9 billion in stock. In one decisive move, Chuck Watson, the chairman of Dynegy, positioned his company to become the most important player in the volatile but potentially lucrative business of trading natural gas and electricity.

But the hastily arranged deal carries big risks for Dynegy as well, skeptical investors and Wall Street analysts say. No one outside Enron appears to fully understand the company's tangled finances, and the speed with which the deal was made did not give Dynegy time to scrutinize Enron's trading book or the web of partnerships Enron has entered to move debt off its balance sheet and hide losses.

The skeptics wonder why Dynegy decided to take on Enron's massive debt, which some analysts say could total $23 billion in loans on and off its balance sheet, instead of simply trying to hire away Enron's best traders, some of whom were already leaving.

"There are many risks associated with this merger that we will not know about for a while," said Carol Coale, an analyst at Prudential Securities. "We're not sure that we know everything there is to know at Enron yet."

In addition, Enron's earnings could be far lower than it has reported, said James Chanos, a short-seller who has been a vocal critic. On Thursday, Enron said in a filing with the U.S. Securities and Exchange Commission that it had used partnerships to overstate earnings by a total of $600 million over the last five years. Chanos said other information in the filing indicated that more restatements were possible.

With so much uncertainty surrounding Enron's finances, Chanos and other analysts question Dynegy's decision to move so quickly.

They note that Dynegy and Enron often traded with each other, and some analysts had wondered whether, if Enron had filed for bankruptcy, those trades might be wiped out, leaving Dynegy unhedged, or unprotected against sudden movements in the prices of natural gas or electricity.

If Enron is not forced to restate its profits down further, then Dynegy has clinched an amazing bargain. Analysts say Enron will make $1.80 a share this year, so Dynegy is paying just six times Enron's annual earnings, about a fourth the average ratio of companies in the Standard & Poor's 500.

Jeff Dietert, an analyst with Simmons & Co. in Houston, said Dynegy had to strike a deal with Enron quickly to make sure that Enron's trading operations and financial health did not deteriorate any further. "If Enron preserves the value of the marketing and trading company, then there is clearly value in the Enron stock," he said.

Preserving Enron's investment-grade credit rating is crucial to keeping the trading operation afloat. To help convince Moody's Investors Service and Standard & Poor's, the major rating agencies, that Enron's rating should remain investment-grade, Dynegy has agreed to inject $1.5 billion into Enron immediately. Still, on Friday, both agencies cut Enron's rating to just one notch above noninvestment grade, or junk, status.

Another question hanging over the deal is how easy it will be for Dynegy to walk away if Enron's finances turn out to be worse that Enron has already disclosed. The merger agreement, according to executives and investment bankers who shaped it, gives Dynegy the opportunity to quit the deal without penalty if major new problems surface. But what exactly those terms are remains unknown.

So far, investors are giving Dynegy the benefit of the doubt. The company's stock rose 17 percent Thursday and Friday, closing at $38.76 on the New York Stock Exchange.