Lately I'm reading up on the new Telecommunications Act. Last week I printed a copy from the Internet and stuffed it in my briefcase. Each night on the train I give it a go and skim a few sections...
When the Merger Doesn't Work: Saved by a Spin-Off?
Some partners turn to the quick sale to raise capital and dress up performance.
Analysts cite several reasons why energy companies might wish to execute a spin-off:
* To cover a failed merger,
* To raise cheap capital, or
* To boost valuation of a diversified company.
In fact, many newly merged energy companies will fit into this last category. No longer just power companies, they now own merchant generation, transmission, pipelines and telecommunications assets.
Also, the energy industry lately has pursued equity carve-outs, a type of spin-off to help the parent raise capital, clarify focus and highlight the subsidiary's independence.
A carve-out lets analysts follow a previously obscured business more accurately, says Jeffrey R. Holzschuh, managing director at investment bank Morgan Stanley Dean Witter. The higher valuations of the carve-out typically are reflected in the parent company's stock, he adds.
Enron's Azurix Spin-Off
Enron recently carved out its water assets in Azurix, says Joe Cornell, president at SPIN-OFF Advisors L.L.C., but retained a 69 percent stake.
"They did a partial spin-off for no other reason than it is cheap access to capital. [Furthermore], they might not do the full spin," he says.
Azurix was formed by Enron to acquire, manage and develop water and wastewater businesses around the world. With deregulation sweeping through the water industry, Azurix plans to acquire water companies formerly owned by the government.
In its first major purchase, Azurix bought Wessex Water in the UK for $2.4 billion, according to Spin-Off Research, an investment advisory firm. Later it acquired water businesses in Argentina, Brazil, Canada and Mexico.
Duke's Gas Gathering Spin-Off
In mid-December 1999, Duke Energy and Phillips Petroleum agreed to carve out Duke Energy's gas gathering and processing businesses and Phillips Petroleum's Gas Processing and Marketing to form a mid-stream company called Duke Energy Field Services, according to Duke Energy. DEFS will become the nation's largest mid-stream natural gas liquids business, according to Morgan Stanley's Holzschuh, which represented Duke Energy in the deal.
"They were the No. 1 and No. 2 competitors in that sector. We are combining them to create an entity that is three times larger than its next-closest competitor," he says.
"That business, we believe, ought to trade in the public markets at a substantially higher valuation than it now trades underneath the Duke hood," adds Holzschuh.
Assuming the new company's value ranges between $5 billion and $6 billion, Duke Energy's equity ownership in DEFS following the initial public offering will range between 55 percent and 57 percent, and Phillips Petroleum's post-IPO ownership would range between 23 percent and 25 percent, according to Duke Energy. Approximately 20 percent of the new company's equity will be offered in its IPO, which is expected in the first quarter.
Holzschuh describes what this type of deal might mean for the energy industry:
"It means you are going to see people separate their generation from their transmission and distribution. It means you are going to see people potentially separate their midstream from their downstream, separate non-regulated businesses from their regulated businesses."
He adds, "You are going to