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Thursday, 29 November, 2001, 21:26 GMT
Enron fights for life after bid collapse
Enron graphic
Energy giant Enron is fighting to avoid collapsing in one of the biggest corporate failures in US history, after the termination of a life-saving $8.4bn (5.9bn) takeover deal.

Rival group Dynegy has pulled out of merger talks which would have saved Enron from a crisis which has seen its share price plunge by more than 90% since mid-October.

Dynegy's withdrawal followed decisions by the three major rating agencies to cut Enron bonds to junk status, over concerns about firm's ability to repay debts.

The downgrade rendered Enron liable to pay immediately $3.9bn of a total of $13bn in debt.

The firm has already appointed PricewaterhouseCoopers as administrators for its European operations, a move seen as a preliminary to a wider bankruptcy filing.

The company said that it had effectively split its European from its US operations, and that it had so far met all its European obligations.

Treasury worries

Enron's crisis, which prompted an 85% slide in its share price on Wednesday and a further 41% on Thursday, has been deemed sufficiently serious to warrant monitoring by the US Treasury Department.

"That is monitored... in terms of any effect it may have on markets or any other areas," a White House spokesman said.

Energy market regulators around the world have also confirmed that they are monitoring the situation, in the hope of staving off serious disruption to trading.

But analysts say that the fact that energy trading is less tightly regulated than share or bond markets could lead to legal problems as Enron's transactions are unwound.

The US House Energy and Commerce Committee's chairman launched an investigation on Thursday into possible accounting abuses by the company.

Survival effort

Dynegy blamed contract breaches, and a "material" change in the firm's prospects, for its decision to end talks begun three weeks ago.

Enron responded by announcing that it had suspended payments "other than those necessary to maintain core operations".

The firm would attempt to retain key employees while it explores "other options" to protect its core energy business, chief executive Kenneth Lay said.

But many observers have doubted Enron's changes of avoiding bankruptcy without Dynegy's support.

Bankruptcy looms

Standard & Poor's, one of the agencies which downgraded Enron's debt, had ranked as a "distinct possibility" Enron's need to file for court protection from creditors should the takeover fail.

Enron itself, in a recent regulatory report, doubted its ability to "continue as a going concern" should its debt be giving junk status.

"Their biggest asset is really their people and the trading floors and when you start losing credibility... that will dry up very quickly," Brian Youngberg, energy analyst at stockbroker Edward Jones told the BBC's World Business Report.

"Based on assets this would be the largest bankruptcy in history."

"The bankruptcy filing is really imminent. The problem is there is really not much that will be left for the common stock shareholders," he added.

Changing fortunes

Enron's crisis represents a rapid turnaround for a company which has won a string of awards, last year posted profits of more than $1bn, and was only recently ranked number seven in the Fortune 500 list of US companies.

But the Houston-based firm ran into trouble six weeks ago when observers questioned mysterious charges in its balance sheets, triggering an investigation by the US financial watchdog.

Enron later admitted that profits between 1997 and 2001 were $600m lower than had been claimed.

The resulting slump in Enron's share price, as investors shunned the company, allowed Dynegy, historically a smaller energy firm, to stage a takeover bid.

A continuing stock collapse made the initial terms of the deal obsolete, and Dynegy is also reported to have baulked at Enron's tangled accounting techniques.

Cutting edge unit

The first many in the energy market knew of Wednesday's problems was when Enron's online trading system, Enron Online, ceased operations.

The unit had been responsible for up to 90% of Enron's earnings, and was believed to have been one of the main attractions for Dynegy of a takeover.

US energy regulators, who said they have begun monitoring Enron's crisis, said on Wednesday afternoon there were few signs of severe disruption to energy markets.

On the New York stock market, Enron shares closed down $3.53 at $0.61 on Wednesday, and were down another 40% in early trading on Thursday, this time to just 46 cents.

The shares topped $90 late last year.

The BBC's Stephen Evans
"It was too clever for its own good"
Brian Youngberg, energy analyst
"Based on assets, this would be the largest bankruptcy in history
Paul Garratt, Utilities Weekly magazine editor
"There will be volatility in the market if a player of this size disappears"
See also:

21 Nov 01 | Business
Crisis fears hit Enron shares
09 Nov 01 | Business
Traders wary of Enron's fate
09 Nov 01 | Business
Enron admits inflating profits
01 Nov 01 | Business
Troubles multiply at Enron
22 Oct 01 | Business
Probe sends Enron shares tumbling
05 Oct 01 | Business
Q&A: Bankruptcy made simple
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