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Thursday, 24 July 2014

Icahn’t

Icahn targets given red alert by Dynegy debacle

Carl Icahn’s reputation already precedes him when he turns up to agitate. Now a court-appointed official has shredded a retooling at Dynegy, where the uppity investor meddled and installed directors. Companies on the receiving end of his tactics, like CVR Energy, have all the more reason to spurn Icahn.

Once a $13 billion powerhouse, Dynegy’s equity is now worth a mere $70 million. The 76-year-old raider-cum-activist has played a significant role in the latest step of the downfall, ever since he helped block a $600 million leveraged buyout by Blackstone at the end of 2010. With a stake of nearly 15 percent, he is the largest shareholder - and responsible for two of Dynegy’s six directors.

Icahn, along with hedge fund Seneca Capital, helped persuade investors that a gas-price revival would reinvigorate the heavily indebted company. As prices kept tumbling, ever more desperate measures were attempted. A restructuring at the end of 2011, after Icahn’s appointees joined the board, shifted lucrative coal-fired assets beyond the reach of bondholders, in a move that up-ended the conventional capital structure. A court examiner slammed the maneuver as a “fraudulent transfer” and recommended that Icahn’s representatives - along with other non-officer members – be removed from the board.

The debacle won’t help Icahn’s broader cause. His shake-up efforts typically involve byzantine deal structures and hardball tactics. Take, for example, his latest target, CVR Energy. Icahn says the $2.3 billion oil refiner should sell itself. Not only does he plan to nominate a full slate of directors, but he lobbed in a takeover bid of his own that includes fiendishly complex contingent value rights. In the last couple of years, he has tried similarly inventive ploys at Commercial Metals, Clorox and Lions Gate - only to eventually walk away.

Other investors may get burned in these situations, but Icahn doesn’t always leave empty-handed. His fund achieved returns of 35 percent in 2011, a year when peers were down about 5 percent on average, according to Hedge Fund Research. But this latest episode at Dynegy provides a red alert for management and shareholders elsewhere. And the more skeptical they become, the less effective Icahn’s antics will be for him.

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A bankruptcy court said on March 12 that Dynegy Holdings must renegotiate a bankruptcy plan after an examiner determined that the firm had participated in an asset transfer that defrauded creditors.

The examiner, Susheel Kirpalani, was ordered during a hearing to work with Dynegy, an electric generator, to reach an agreement on a restructuring plan for the company.

Shares in Dynegy Inc, the parent company of Dynegy Holdings, have plummeted by 50 percent since the examiner issued the report on March 9.

The coal assets that were moved last September - two months before Dynegy Holdings filed for bankruptcy protection - were valued at $1.25 billion by the board.

“Throughout the planning and execution of the prepetition restructuring, the Dynegy Inc board favored paths that benefited Dynegy Inc and its stockholders to the detriment of Dynegy Holdings and its creditors,” Kirpalani wrote in a 173-page report filed with the U.S. bankruptcy court in Poughkeepsie, New York.

Icahn Associates owned 14.7 percent of Dynegy Inc at the end of 2011, up from 9.3 percent in October 2010. In December 2010, Icahn offered to buy Dynegy for $5.50 a share, valuing the company at $665 million. Icahn has two representatives on Dynegy’s board, Vincent Intrieri and Samuel Merksamer.

Dynegy shares were trading on March 12 at 58 cents apiece, valuing the firm at about $70 million.

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