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The Merchant Asset Fire Sale: Deal of the 21st Century?

Companies that were on a buying spree before 2001 are putting assets worth billions n the block
Fortnightly Magazine - March 15 2003

grabs. Official announcements, however, are less specific, and indeed many companies are still formulating liquidation strategies.

"People are making tough decisions about what to keep and what not to keep," says Douglas Fried, a partner with Chadbourne & Parke. "There is more of a willingness among companies to enter partnerships and joint ventures with other companies and financial investors that have more liquidity. There are more opportunities now to bring financial players into these projects than we've seen in a long time."

Other behind-the-scenes trends also suggest the industry is changing in ways both subtle and dramatic.

"Corporate paper-bonds and bank debt-is where the activity is happening," Boken says. "People who expect to be players in the utility industry for a significant period of time are buying paper at a discount and exercising their influence to ensure that the core assets of these entities are not sold off on a one-off basis."

In some cases, these players might be acquiring corporate paper with an eye toward a future Chapter 11 bankruptcy filing. "It's not unusual in restructuring situations to find an equity player buying senior debt at a discount and ultimately negotiating for the equity out-of-court or in a Chapter 11 process," Boken adds.

Whether through bankruptcies or not, a major asset reshuffling seems likely to begin in 2003. Some of the buyers will be major utility companies from the United States and elsewhere. "European utilities may come back into the market, and there is growing interest among Japanese and Canadian utilities that may be viable long-term players," Zimmer says.

Additionally, significant assets will likely enter the hands of equity investment funds.

"There will be a shift here," Boken explains. "The buyers will be financially sophisticated people who are accustomed to investing in distressed markets. The industry will be dominated by very disciplined boards that are put into place by these financial investors." Later, when the market's health returns, ownership will shift again as these financial investors exercise their exit strategies.

Ultimately, these shifts might benefit the industry by bringing greater discipline to utility asset management. "Being an optimist, I'd say that the industry is going through a cleansing," Fried says. "In the long run, it will be stronger after the problems are resolved."

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