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November 5, 2001
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Enron could be forced into major asset sales

Struggling energy giant Enron Corp may have to sell power plants, pipelines and even some of its energy trading assets as it seeks to head off a credit crunch and restore investor confidence, investment bankers said.

While Houston-based Enron lined up $1 billion of new credit last Thursday, it still suffered a second credit rating cut amid concerns about questionable financial transactions that have triggered an investigation by the US Securities and Exchange Commission.

The deteriorating picture, including a drop of almost 70 per cent in its share price in less than a month, has close watchers of the company saying it will probably have to break itself up if it is to stay independent.

"It will have to refocus on its core strengths and get out of other businesses," said one investment banker close to Enron.

There is also the possibility of a full bid for the company given its market value has now sunk to less than $9 billion. On Sunday, Britain's Independent reported that energy giant Royal Dutch/Shell Group may mount an $11 billion bid for Enron.

Still, most bankers think such an opportunistic bid is unlikely given the questions hanging over Enron's balance sheet.

During its third-quarter results announcement last month, the company said it expected over a billion dollars of writeoffs related to several soured investments, including broadband communications and water utility interests.

It also announced an extra $1.2 billion writedown of shareholder equity related to investments that were not recorded on its balance sheet.

The big challenge Enron now faces is to decide what assets it could sell first and what is the best possible price it can achieve from them, the bankers said.

"In terms of classic corporate finance, the question they should ask is: 'Do I get enough money that represents equity?" said Alan McFarland, a Wall Street veteran and co-founder of merchant bank McFarland Dewey&Co.

Enron's future is still likely to lie in its wholesale energy trading operations -- with an average trading volume of up to $10 billion a day -- which bankers say comprise 60 per cent to 65 per cent of the value of the whole group.

CIBC Markets estimates the asset-per-share valuation of this business to be around $24 out of a total of about $38 of assets per Enron share.

The company's known liabilities are pegged at $12 per share by CIBC, though given the uncertainty over the off-balance sheet transactions, this is the area most in question on Wall Street as shown by a share price that ended last week at $11.27.


At the top of the list of likely asset sales is its 65 per cent of Dabhol Power Company, which controls a power project in the western Indian state of Maharashtra. Altogether, Enron's assets in the company are estimated to be worth $870 million, analysts said.

Enron is currently talking to two local players in India -- BSES Ltd and Tata Power Ltd -- about a sale of the stake, a deal that was in the works well before the recent crisis of confidence.

The company is also likely to consider selling its gas pipeline and transportation business, which include 25,000 miles of gas pipes crisscrossing the United States.

"That could fetch up to $4 billion," says John Olson, analyst at Houston-based investment bank Sanders Morris Harris.

This business has shown an average annual profit growth of 18 per cent to 20 per cent in recent years and includes mainly the Northern Border Pipeline Company, Transwestern, Florida Gas Transmission, and EOTT Energy.

Bankers say finding a buyer for what was once Enron's crown jewels would not be a problem, with companies such as El Paso, Williams Cos, and Duke Energy always on the lookout for such assets.

Olson estimates that buyers for these assets would have to assume $1 billion of related debts.

Indeed, Enron began offloading some assets before the current problems became so pronounced, selling its Portland General Electric unit for $1.8 billion to Northwest Natural Gas Co as it began the process of cleaning up its balance sheet.

Also in line for sale, analysts say, would be pieces of its international operations, which could easily fetch Enron about $6.5 billion.

These assets include power plants and transportation services in Brazil, Argentina, Australia, and also Europe. Collectively, they are contributing an average of 15 per cent returns on equity for Enron and up to $700 million of annual earnings.


Some industry analysts say that if Enron's financial crisis worsens and rating agencies continue to downgrade the company's debt, it may even take a close look at its trading businesses.

One investment banker said the company should be able to get rid of its international trading and non-energy commodity trading operations, which account for about a quarter of its total trading revenues, at a reasonably good price.

Enron is the leading player in the UK's spot gas trading market, and is also a leader in liberalising electricity and gas markets in mainland Europe. It also has some metals, coal, forest products and steel trading interests.

However, some analysts question whether a break-up of Enron could diminish the value of the assets.

"The whole does add up to more than the sum-of-the parts," says Ed Krapels, a consultant with ESAI, a Boston independent research firm specialising in energy trading.

Most are also in the dark regarding the timing of Enron's need for cash.

The speed of any asset sales program will depend on how much Enron's customers and creditors squeeze the energy trading giant.

"Further deterioration in Enron's share price and credit standing would require Enron to post larger cash deposits with many of its counterparties," says Krapels.

If the demands for cash deposits surge, then Enron could be forced into a fire sale rather than a slower and more deliberate offloading of certain assets.

"The additional deposit requirement could exceed Enron's credit lines and the schedule at which it can sell assets to raise cash," Krapels said.

Shell eyes $11 billion bid for Enron

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