Vistra Energy Corp said on Monday it would buy Dynegy Inc in an all-stock deal worth $1.74 billion, combining two Texas-based power producers in the latest merger in an industry dealing with shrinking profit margins, Reuters reported.
The combined company will be worth more than $20 billion, inclusive of debt, and have integrated power generating assets and retail businesses across six of the largest electricity markets in the United States.
Debt-laden power producers such as Dynegy have seen their margins fall, as cheap natural gas from shale fields drives electricity prices lower, leading a handful of power companies to merge to cut costs and streamline operations.
Earlier this year, utility Sempra Energy agreed to buy power transmission company Oncor for $9.45 billion, while Vistra’s rival, Calpine Corp, is selling itself to investors led by Energy Capital Partners in a $5.6 billion deal.
Vistra, the largest retailer and generator of electricity in Texas, is based in Irving, while Dynegy is headquartered in Houston but the majority of its power plants are in the northeast United States and Illinois.
“Regional diversification is a big discussion point for Vistra, but it’s also about combining assets, getting economies of scale and being able to extrapolate operating efficiencies,” said analyst Shahriar Pourreza of Guggenheim Partners.
Vistra Chief Executive Officer Curt Morgan told Reuters his firm would sell three gas power plants in Texas, which produce a combined 900 megawatts, to reduce its market share in the ERCOT generating zone which covers most of the state to below 20 percent, allaying any potential competition concerns.
The Public Utility Commission of Texas has cited capitalization and competitive concerns as the main reasons for scuppering attempts by two other buyers to acquire Oncor before Sempra agreed its deal.
“We have a high degree of confidence that the deal will be approved (by regulators),” Morgan said.
Dynegy shareholders will receive 0.652 shares of Vistra for each share of Dynegy they own, translating to a price of $13.24 per share and a 21 percent stake in the new firm.
The combined company, which will have annual earnings before interest, tax, depreciation, and amortization (EBITDA) of about $3 billion, will serve around 2.9 million retail customers and have around 40 gigawatts of generating capacity.
Vistra said it would achieve an estimated $350 million of annual cost savings through areas such as better procurement practices, as well as additional benefits related to tax and improvements to its balance sheet.
Dynegy’s high existing debt level would not be a concern for Vistra shareholders, according to Morgan. Dynegy’s debt-for-equity ratio of 5.41 is more than double the industry median, according to Thomson Reuters data.
“Shareholders will do the calculation around leverage versus the value creation that will be generated and see the benefits of the deal,” he said.
Vistra’s shares were 8.3 percent lower at $18.62, while Dynegy’s stock was 6 percent higher at $11.90 after jumping 11.3 percent earlier in the day.
Citi, Credit Suisse and law firm Simpson Thacher & Bartlett LLP advised Vistra, and PJT Partners, Morgan Stanley and lawyers Skadden, Arps, Slate, Meagher & Flom LLP worked with Dynegy.
Reporting by Taenaz Shakir and John Benny in Bengaluru and David French in New York; Editing by Sai Sachin Ravikumar and Lisa Shumaker
