What Does the Deal Between Ameren Corp. (AEE) and Dynegy Inc. (DYN) Mean for Them

Recently, Dynegy Inc. (NYSE:DYN) agreed to buy the merchant generation business Ameren (NYSE:AEE) Energy Resources (AER), from the power company Ameren Corp (NYSE:AEE) for around $900 million, including around $180 million in tax benefits. Interestingly, the deal does not involve any cash or stock issuance, as Dynegy will undertake around $825 million in debt with the acquisition of Genco, AER’s subsidiary. Is the deal better off for both Dynegy and Ameren? Let’s find out.

Dynegy and Ameren

Dynegy Inc. (NYSE:DYN) is involved in the business of production and sale of electric energy, capacity, and ancillary services to RTOs and ISOs, integrated utilities, electric cooperatives, and industrial customers, from twelve operating power plants in six U.S. states with a total capacity of 9,800 MW. The company has two main segments: the Coal segment and the Gas segment. The majority of its fleet capacity, 6,771 MW or 69.4% of total fleet capacity, was from the Gas segment, while the Coal segment has a capacity of around 2,980 MW.

Ameren Corp (NYSE:AEE) is a public utility holding company operating in three business segments: Ameren Missouri, Ameren Illinois and Merchant Generation. The majority of its 2012 revenue, $3.25 billion or 47.6% of total revenue, was generated from the Ameren Missouri segment, while the Merchant Generation segment contributed more than $1 billion in revenue in 2012.

The Merchant Generation segment is the only loss-making segment among the three, with more than $1.5 billion in 2012 net loss, while the Ameren Corp (NYSE:AEE) Missouri and the Ameren Illinois segments generated profits of $416 million and $141 million, respectively. In 2012, the Merchant Generation had more than $1 billion in income tax benefit.


Dynegy’s benefits

Dynegy Inc. (NYSE:DYN) believes that the acquisition of AER would deliver significant shareholder benefits in the most capital efficient manner. By combining AER, its annual adjusted EBITDA would increase from $150 million to $332 million, or from $1.50 per share to $3.32 per share, a growth of 121%. In order to achieve that growth alone, Dynegy would have had to commit more than $1 billion of capital to repurchase around 55 million shares. Dynegy commented that the deal would be much better off for the company in terms of operational, commercial, and financial perspective.

In terms of operational perspective, Dynegy Inc. (NYSE:DYN) would synergize more than $60 million in the first year, with lower cost of fuel, G&A, and operating cost by its increased scale and leveraging its existing infrastructure. From the commercial perspective, it would allow Dynegy to have fleet capacity of around 900 MW for 2016/17 PJM capacity auction.

In addition, Dynegy mentioned that the deal would double its “upside leverage to natural gas prices and MISO market recovery.” In terms of financial perspective, the deal is expected to be accretive to adjusted EBITDA in 2014 and the free cash flow by 2015.

Ameren’s benefits

For Ameren Corp (NYSE:AEE), the sale of its merchant units would improve its operating earnings and cash flow in the near future. Ameren’s CEO Thomas Voss said: “We expect that this transaction will reduce business risk and improve the predictability of our future earnings and cash flows, which is expected to strengthen Ameren’s credit profile and support Ameren’s dividend.”

Indeed, divesting non-core businesses to reduce the debt level would strengthen company’s balance sheet, and improve its earnings and cash flow in the future. Dominion Resources (NYSE:D) recently announced that it would sell three of its power plants in Illinois and Massachusetts to funds controlled by Energy Capital Partners for around $650 million after-tax proceeds.

At the current trading price of around $34 per share, Ameren is trading at 7.1 times EV/EBITDA. Dominion Resources is a much larger company, with around $32.4 billion in total market cap. At around $57 per share, Dominion is valued at around 11.6 times EV/EBITDA. Both Ameren and Dominion are paying good dividends, yielding 4.7% and 4%, respectively.

Foolish bottom line

I think after the deal, both Dynegy Inc. (NYSE:DYN) and Ameren Corp (NYSE:AEE) would be in much better shape, and their operating performance and profitability would significantly increase in the coming years. Income investors might like Ameren Corp (NYSE:AEE) the most due to its highest dividend yield.

The article What Does the Deal Between Ameren and Dynegy Mean for Them originally appeared on Fool.com and is written by Anh HOANG.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!