There Could Be Some Risk Surrounding the Dynegy and Vistra Energy Deal

Dynegy Inc (NYSE: DYN) shares were up significantly last week, following a Wall Street Journal report that Vistra Energy Corp (NYSE: VST) was in talks to buy DYN, in an attempt to diversify its holdings. Now, DYN shares were down over 2% at one point during the pre-market, following some comments made by a UBS analyst, indicating that Vistra Energy would require an immense degree of synergies to consider any M&A deals.

Risk Behind Potential Deal

According to UBS analyst Julien Dumoulin-Smith, Vistra Energy “talked down” the prospects, and the company indicated that any sizable M&A deal would require significant and detailed synergies, in a conference call earlier this week. That said, these comments could have been the reason for DYN’s volatility in the after hours yesterday, as well as today.

When commenting on Vista Energy’s management’s discussion regarding the need for substantial synergies, Dumoulin-Smith stated, “These would likely be achieved first on the SG&A side as a merger would bring headcount savings and real estate consolidation, but also on the fuel procurement side as the increased coal demand could be leveraged to reduce rail cost for example. While the magnitude of these synergies remains the big unknown, we highlight that the two IPPs that have been front and center on the M&A front (DYN and CPN) already have fairly lean SG&A structures at ~$5-6/kW-year.”

What You Need to Know About Dynegy

  • Dynegy shares have been up over 18% over the past week, as of May 23, 2017, after buyout rumors surfaced.
  • There could be some risk surrounding the potential deal, and Vistra Energy “talked down” the prospects of a deal, and comments made by UBS analyst may have sent shares into a frenzy.
  • DYN had a price-to-book ratio of 0.50, while the industry average was 3.5.
  • The company had a trailing 12-month (TTM) price-to-sales ratio of 0.3, while the independent power producers industry average was 1.1.
  • Dynegy operated at a loss in the most recent trailing 12-month period, and therefore, does not have a price-to-earnings ratio, which is similar to some of its peers.

Take a look at DYN on the daily chart.

Dynegy

Source: TradingView

Bull Case

Dynegy is currently trading at attractive valuations, and it would be considered undervalued in relation to its peers. Consequently, this could be one of the arguments that the Vistra Energy and Dynegy deal may still be on the table. Moreover, the stock has been trading in a downtrend, and the Wall Street Journal report caused the stock to break out, and it could be a momentum play.

Bear Case

There are some risks surrounding the rumored takeover approach. UBS analyst Julien Dumoulin-Smith indicated that Vistra Energy may be shying away from the potential M&A deal with Dynegy. These comments are an indication that Vistra Energy could potentially walk away, which would send DYN shares lower. However, nothing is set in stone, and we’ll have to wait until the company issues a statement or comments further on the matter.

From a technical standpoint, some traders may have noticed that DYN hit the 200-day simple moving average, which held as the resistance area. Thereafter, DYN began to pull back, and could start to fill the gap.

Final Thoughts

There’s some risk surrounding Vistra Energy’s rumored takeover approach to Dynegy, after UBS analyst noted that Vistra Energy would require detailed and significant synergies before considering any prospects. That in mind, this has added some volatility to DYN, and there are still multiple reasons why some traders may be bullish, as well as bearish on the stock.

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