16-07-01 Houston power generator and marketer Dynegy made a big step into Europe, announcing it would acquire the natural gas storage unit and associated assets of British oil company BG Group for £ 421 mm ($ 590 mm). Dynegy has been trading and marketing energy in the UK for several years. But the purchase of the unit, BG Storage, will include Dynegy's first physical assets in the UK, thus expanding its energy delivery network into Europe and providing a springboard for future growth on the continent.
The deal also allows Dynegy to replicate abroad the "convergence" strategy it's been following in the US, playing energy trading and marketing and generation, transmission and storage off each other to maximize profits.
"Despite the California distraction, Dynegy continues to expand on its growth plan," chairman and CEO Chuck Watson said in a conference call. "We are transferring our core competitiveness to other parts of the world and other markets." Analysts were impressed with Dynegy's purchase. "[These] guys keep making great acquisitions and very frugally," Standard & Poor's analyst Craig Shere said.

Berkshire-based BG Group said that after an "exhaustive" review, it concluded it no longer needed to own the storage unit to meet its strategic objectives, which encompass natural gas purchase, distribution and supply. "The proceeds will be utilized elsewhere to further our aims of growing the business and simultaneously strengthening returns," BG Group CEO Frank Chapman said.
Anthony Eccles, an analyst at Dresdner Kleinwort Wasserstein in London, said it was positive for BG Group to get rid of the storage business because it was a poor performer. (Several officers of Dresdner Kleinwort Wasserstein are general partners in the fund that owns The Deal)
"Strategically, this looks like a good deal for BG; it allows them to focus on the full chain of gas supply," Eccles said. "They didn't need the storage business. It was an under-performing asset, not very profitable."
Indeed, while the assets earned an operating profit of £ 11 mm before exceptional items last year, they turned in an operating loss of £ 189 mm post-exceptionals. Revenue was only £ 92 mm. Still, BG said the total net assets being sold were valued at about £ 340 mm at the end of the last year. On that basis, Dynegy's offer gives BG Group almost a 24 % premium for the properties.

The deal is not that significant for BG's balance sheet, which is already in a healthy condition with a debt-equity ratio of about 9 %. The deal requires approval by UK authorities, including the Gas and Electricity Markets Authority, the Department of Trade and Industry and the Office of Fair Trading. "We feel very comfortable of the probability of those approvals," Watson said.
Dynegy and BG Group hope to close the deal by September. The unit and its 260 employees, 40 % of whom are based at the company's headquarters in Solihull, West Midlands, will become part of Dynegy Europe. The acquisition should add 7 cents to 9 cents to Dynegy's earnings per share next year and even more in future years, Dynegy CFO Bill Doty said, contributing to its goal to grow at 20 % to 25 % per year.
With the announcement, Dynegy revised its 2002 guidance to $ 2.50 to $ 2.60 earnings per diluted share. Thomson Financial/First Call's recent consensus estimate was $ 2.42. The purchase includes 30 wells with five offshore platforms, nine salt caverns, about 19 miles of pipeline and an onshore natural gas processing terminal.

Dynegy said two of the facilities included in the transaction, Rough and Hornsea, are key providers of physical storage space in the UK natural gas market and are used by about half the country's natural gas shippers. The facilities used to be a regulated monopoly but were removed from direct regulation in 1999.
Rough, a partially depleted offshore storage facility in the southern North Sea, has a deliverability rate of 1.5 bn cfpd, and Hornsea, an onshore salt cavity installation, has a deliverability rate of 620 mm cfpd. Combined, the two facilities are capable of storing 111 bn cf of natural gas.
Dynegy has been active in UK energy markets since 1994, when it became a leading player in the development of a liberalized natural gas market. With offices in Austria, Switzerland, Holland, Italy and Spain, Dynegy is one of Europe's largest energy marketers and traders.

BG Group, formerly known as British Gas, is an integrated gas major with operations spanning exploration and production, transmission and distribution, LNG and power in about 20 countries. Its operational strategy is to develop gas markets and construct infrastructure in tandem with its exploration interests in partnership with local governments and energy companies. BG Group said it will continue to have a commercial relationship with BG Storage to carry out its gas trading activities.
Dynegy did not use an outside financial adviser. Its inside deal team consisted of Watson, Dynegy Europe President Gary Cardone, Doty, General Counsel Ken Randolph, Executive Vice President of Mergers & Acquisitions Hugh Tarpley, Senior Vice President of Energy/Mergers & Acquisitions John O'Shea and Senior Vice President of Global Gas Mike Flinn. It did tap law firm Clifford Chance, using Bleddyn Phillips out of London.
BG Group used Julian Mylchreest and James Steel at Schroder Salomon Smith Barney. Jon Wormley, executive vice president, and Nigel Shaw, vice president for UK and Ireland and head of BG Storage, led the in-house team.