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Icahn to Buy Dynegy: A Win for the Pill

Peripatetic Carl Icahn announced a deal to buy Dynegy, the power company whose planned merger with Blackstone Group Icahn had just helped to block.

Talk about a deal coming out of left field.

Fresh off his proxy battle loss to Lions Gate, peripatetic Carl Icahn announced a deal to buy Dynegy, the power company whose planned merger with Blackstone Group Icahn had just helped to block.

Dynegy? I thought the Dynegy deal was dead. I almost forgot about the company already. This deal is almost as shocking as Cliff Lee’s signing with the Philadelphia Phillies.

According to the announcement, Icahn Enterprises L.P., the company run by the septuagenarian raider cum hedge fund activist has agreed to buy Dynegy for $5.50 per share in cash, or about $665 million. Dynegy also has about $3.95 billion of outstanding debt, net of cash.

This works out to $0.50 per share more than Blackstone’s previous offer. IEP and its affiliates own 9.9 percent of Dynegy's stock and have previously acquired options to buy about 5 percent of Dynegy's shares.

Just late last month, Dynegy called off its deal to be acquired by Blackstone Group for $5 per share after it realized it would not receive enough votes at its Special Shareholders Meeting of Stockholders held Tuesday. The deal was aggressively opposed by Icahn and another major shareholder, Seneca Capital.

The Icahn-Dynegy merger is one of those win-win types of deals. First of all Icahn specifically and activists in general get to make their case that they play a critical role in boosting shareholder value.

Shareholders win too, of course, because they are to receive 10 percent more money than what they would have received from Blackstone.

The deal is also a victory for proponents of poison pills in general.

Remember, when Dynegy cancelled its merger with Blackstone, it also instituted a shareholder rights plan. It was designed to prevent unfriendly investors from acquiring more than 10 percent of the stock and those who already have exceeded that threshold — Carl Icahn specifically though not identified — from buying more.

Indeed, pill fans — especially its inventor, Marty Lipton of Wachtell Lipton Rosen & Katz — have long argued that pills are important because they stop the clock or slow down the process to give management more time to sort through serious bids and not lose the company to an unwanted suitor on the cheap.

“The Board of Directors adopted this short term, narrowly tailored Rights Plan to prevent any person from obtaining control or de facto control of Dynegy without offering a control premium to all Dynegy stockholders,” the company said in its announcement when it instituted the pill. “The issuance of the Rights is not intended to prevent a sale of control of the company that is determined by the Board of Directors to be fair, advisable and in the best interests of all Dynegy stockholders.”

Dynegy was right. It still moved ahead with the sale of the company. And it even did the deal with Icahn, a guy who will never pay a penny more than he has to for an asset.

However, it was able to thoughtfully negotiate the deal with Icahn and get more money for its shareholders, which is what fiduciaries are supposed to do. It did not use the pill to further entrench management, which the critics have historically argued. In fact, the two parties said Dynegy will field better offers until January 24.

"All stockholders should benefit from the auction process which has now begun at a price which is 10% higher than the last bid,” said Icahn, in a statement.

Score this one for Lipton and all poison pill proponents.

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