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 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.
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.
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