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. Last Updated: 07/27/2016

Enron Deal Could Be a Pipe Dream for Dynegy

Dynegy has negotiated a great takeover. And it may end up buying Enron, too.

As part of its planned acquisition of Enron, Dynegy will get the crown jewel even if the overall deal falls apart. In return for its $1.5 billion investment on Tuesday, Dynegy has the right to acquire Northern Natural Gas, a pipeline system that is probably worth more.

As Dynegy stock soared 14 percent on Monday, Enron's rose just 7 percent. That widened the spread -- the profit a trader could lock in by buying Enron and selling Dynegy short, assuming the deal goes through -- to 28 percent.

The big premium probably reflects more than the fact that this deal will not close for many months. There is at least a possibility that Dynegy will renegotiate the price, or even walk away, as it learns more about Enron's business.

Not that Chuck Watson, Dynegy's chairman and chief executive, was threatening to do any such thing. In a talk to analysts Monday, and in a later interview, he was extraordinarily upbeat about Enron's trading business even as he dismissed many of the company's diversifications as failures.

Full details of the agreement between the two companies will not be known until Tuesday or Wednesday. But it appears that if the agreement falls apart, Dynegy has the right to keep the pipeline without putting up additional cash.

Speaking to analysts Monday, Rob Doty, Dynegy's chief financial officer, said the company was paying about seven or eight times the cash flow of the pipeline business.

Walking away from the deal might cost Dynegy $350 million if it could not cite any material adverse change in Enron's business, as provided in the merger agreement. But one way to look at this deal is that Dynegy is spending $1.85 billion for the pipeline and a right to get the rest of Enron on the agreed terms.

Watson said he was confident that things would not go wrong. "We have comfort there is not another shoe to drop," he said. "If there is no shoe, this is a phenomenally good transaction."