Dynegy

Dynegy (DYN) was another idea I saw in the manual of ideas. The company is mentioned as an holding of Icahn (15%) and Altai Capital (5%).  Seneca was also a large holder (12%). The company was trading at a price of $1.65 for a market cap of $203m when the manual of ideas was published. Since then the price has declined further, yesterday the stock was trading at $0.55.

Great! A chance to buy in below Icahn, Seneca and Altai. Not so fast.

The company has gone through some major corporate restructuring since March. In fact, it filed for bankruptcy restructuring – had its plan criticized by the public examiner and refiled. The final plan calls for converting debt holders to equity leaving current holders with just 1% of the company that will emerge from bankruptcy. In addition, the final plan calls for equity holders to receive 5-year warrants to purchase an additional 13.5% of the new company. Bankruptcies and special situation investments are complicated things, often offering investors who are willing to buy shares during the bankruptcy spectacular returns.

Dynegy operates in the utilities industry. It is an independent power producer. The company has 16 operating plants in six states. The company’s plants are coal and gas powered. It has been hit by the drop in natural gas prices. The company believes a $1 change in Natural Gas prices changes its EBITDA by $150m. In  2010, Ichan offered to buy the entire company for $5.50/share. Seneca led a shareholder opposition saying the price was too low. Since then, Seneca has a sold most of its holdings (and may not even hold shares anymore).

Management has aggressively cut costs in the last few months. When it emerges from bankruptcy, DYN will be the least levered of the independent power producers. It does face some headwinds even post-emergence – rising coal transport costs and expiring tolls on its  gas plants. I don’t understand in enough detail the power industry to take a position in a bankruptcy ravaged company. The future does not seem locked in and there is enough hair here to keep me from investing. This one is simply in the too hard pile for me.

For investors who understand the power business however, this may present a great opportunity. Jamie Zimmerman’s LiteSpeed Management has been a buyer of late. Litespeed owns 26% of the company and seems to be aggressively buying more.

 

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