Search the Internet          Tips  Sites: Finance, Investment

Buyout funds flock to Enron? Might be a PIPE dream

It's going to take a lot of sweet-talking to get private equity firms in public entities to pour cash into troubled energy trading giant Enron Corp, buyout executives and industry watchers said on Tuesday. PIPE (private investments in public entities) investing may not be easy to come by.

Houston-based Enron, whose shares have been hammered on concerns over credit problems and accounting practices, is reportedly seeking $2 billion from investors to bolster its balance sheet. On Tuesday, its shares fell $1.50, or 13.4 per cent, to $9.67, on the New York Stock Exchange, the lowest in nearly a decade.

Leveraged buyout firms, which specialise in buying large stakes in companies and help manage them for eventual sale, are typically reticent in buying stock in public companies. And worries over Enron's accounting transparency could force investors to spend months on due diligence, delaying any short-term infusion, experts said.

"Enron is a tough one," said David Stein, partner in the Fund Evaluation Group, which advises private equity investors. "They do so much esoteric stuff that it would take a long time to figure out."

Enron said last week it had obtained $1 billion in secured credit lines from J P Morgan Chase & Co and Salomon Smith Barney. However, the Wall Street Journal reported the company is seeking some $2 billion in cash from major buyout firms such as Blackstone Group and Clayton Dubilier & Rice in return for an equity stake in Enron.

Enron, Blackstone, and Clayton Dubilier all declined comment. However, people familiar with the situation said Clayton Dubilier wasn't interested and Blackstone is willing to discuss an Enron proposal.

Private equity executives echoed the view that the lack of transparency in Enron's accounting would pose a serious hazard in effectively valuing the company as a precursor to an investment.

"It would take a long time to figure out," said one executive with a major US buyout firm. Even potential buyers of Enron assets say they have been baffled by Enron's financial reporting.

"Our lawyers looked at some of Enron's stuff in the past and walked away shaking their heads," said an executive with a competing firm who asked to remain anonymous.

However, buyout executives didn't reject such an investment outright. Despite problems that have driven Enron's shares down from $75 on January 3, the company still generated $100 billion in revenue last year and $1.4 billion in net earnings, mostly from huge trading operations in electricity and natural gas.

"It's definitely an opportunity," said one advisor to private equity funds. "It's a distressed situation and it has stable cash flow." But, this advisor added, "if the accounting is questionable, you have some serious issues there. You are basing your investing on the numbers the company has provided."

If Blackstone did invest in Enron, it would be a step away from its traditional strategy of buying controlling stakes in private companies for eventual sale.

"Our limited partners (investors) don't like this kind of investing, in general, so you have to have a compelling reason," said Steven Schwarzman, Blackstone's chief executive and co-founder, at a recent conference in New York.

Most private equity funds say their pension fund investors prefer they don't invest in public stocks, since those investors could just as easily buy the stocks themselves without paying fees to the buyout firm.

However, some buyout firms, like Warburg Pincus LLC, have lately made a push into public stock investing, known as private investments into public entities, finding that the market meltdown in the last year has made valuations overly attractive.

Blackstone's Schwarzman said PIPE investing is like being "savaged, if the underlying security goes down."

YOU MAY ALSO WANT TO READ:
Enron could be forced into major asset sales
SEC inquiry now full-scale probe: Enron
Enron in talks with banks for new credit line
Enron stock sustains further heavy losses
Mutual funds sell Enron on management concerns
Enron posts loss after taking $1 billion in charges

Tell us what you think of this report