WSJ(1/14) UBS Emerges As Top Bidder For Enron Trading Unit 		

01/14/2002
Dow Jones News Services
(Copyright ? 2002 Dow Jones & Company, Inc.)


  By Mitchell Pacelle and Rebecca Smith 
  Staff Reporters of The Wall Street Journal 

UBS AG, the giant Swiss financial firm, emerged the apparent victor to acquire Enron Corp.'s North American energy-trading operation. Enron hopes the deal will breathe new life into its dormant trading business, once the generator of 90% of the Houston company's profit. 

But obstacles to resurrecting the business remain formidable, as indicated by the fact there were only two serious bidders -- UBS and Citigroup Inc. Enron wouldn't see any serious money from the UBS deal for at least a year, indicating how difficult it will be for the energy company's creditors to recover what they are owed. Enron filed for Chapter 11 bankruptcy-court protection on Dec. 2, the largest such filing ever, shielding the company from creditors as it seeks to reorganize. 

Under the terms of the deal, which is subject to bankruptcy-court approval, Enron would transfer to UBS Warburg, the investment banking arm of UBS, its wholesale energy-trading operation, including a staff of roughly 800 people and computer systems and hardware that comprised its once-mighty EnronOnline Internet-based trading platform. UBS wouldn't be acquiring any of Enron's huge book of trading positions which gradually would be unwound. It also wouldn't provide any cash upfront to Enron. 

Instead, UBS would pay royalties to Enron amounting to one-third of the energy-trading enterprise's pretax profit for a 10-year period, according to Enron. UBS would have an option to eliminate the royalty payments through the payment to Enron of money in years three, four and five. UBS would pay Enron 5.75 times Enron's prior-year payment for each one-third share of royalty eliminated. As such, it could completely eliminate Enron's royalty payments by the end of the fifth year. 

As incentive to buy out Enron, UBS's royalty payments otherwise would increase by 10% from years five through 10, up to a maximum of 44% share of pretax profit. 

Enron Chief Financial Officer Jeffrey McMahon said yesterday that he felt it was a "grand-slam great deal" for creditors since new life is being breathed into a "perishable commodity." Enron's staff had been kept together largely on the basis of retention bonuses that expire at the end of February. The trading operation effectively suspended operations prior to Enron's Chapter 11 filing last month. 

Enron had hoped to bring in a credit-worthy partner to take a 51% stake in a new trading joint venture, leaving the energy company with a 49% stake. But Mr. McMahon said no bidder was interested in that deal. There also were no bids for the trading operation from rival energy or energy-trading companies. One possible reason was that resuscitating Enron's vast trading business would require a top credit rating, lots of capital to back trading operations and an expert credit-risk department to keep track of what traders are doing and to constantly revalue the trading book. 

Since the Enron debacle, other energy-trading firms have taken pains to show they are de-emphasizing commodity-like trading of electricity, which Enron pioneered, and are instead concentrating on selling their own output of energy products and entering into contracts to protect themselves against price volatility. 

Mr. McMahon said he feels that "by virtue of a AA-plus bank purchasing this business, it changes the landscape of the energy-merchant business forever" by putting more clout in the hands of institutions with top credit ratings. UBS apparently hasn't committed to provide any set level of capital. There is no determination, yet, for how royalty payments would be divided among Enron's thousands of creditors. 

The largest question, though, is whether the trading business can truly be revived. Although Enron's global wholesale division, which included as its biggest component the North American energy-trading operations, generated about $3 billion in pretax profit during the first nine months of 2001, it has been dormant now for more than a month. Martin Bienenstock, Enron's lead bankruptcy lawyer, characterized the deal as "the sale of something that was dead that we are trying to bring back to life." 

Competitors say they think a certain amount of Enron's trades were conducted at very thin margins in order to build volume, and that such trading practice likely will disappear. "You'll see the churn going away," says Michael McNally, chief financial officer of TXU Corp., now the biggest electricity trader in Texas. He thinks EnronOnline has "significant value but there's only a limited number of people who would know how to use it." Scaled to transact trades on hundreds of types of contracts, the platform is oversized for most uses. 

UBS Warburg, which bought PaineWebber in 2000, has looked to expand its U.S. market share, and the Enron deal would provide entry into energy trading. John Costas, chief executive of UBS Warburg, said Friday the Enron unit would be "a valuable extension of our world-wide trading activities." 

The winner of the auction, held under the bankruptcy court's supervision, was announced shortly after noon Friday in a packed Manhattan courtroom, less than an hour after the two bidders had submitted final offers. Enron's advisers and its creditors committee, which endorsed the UBS deal, had negotiated nonstop for more than 24 hours. In addition to Citigroup, which Mr. McMahon said competed "neck and neck" with UBS, BP PLC, the British oil company, had submitted a $25 million bid for the computer settlement support system of the Enron unit. 

The proposed UBS transaction is subject to approval by Judge Arthur J. Gonzalez of the U.S. Bankruptcy Court of the Southern District of New York, who officially closed the auction to new bidders Friday. A hearing is set for Thursday at which creditors will have an opportunity to voice objections. 

Separately Friday, Judge Gonzalez declined to transfer the bankruptcy case to Houston, denying motions from several creditors who had argued that Enron's headquarters city was a more suitable venue. 

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Anita Greil contributed to this article. 

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Journal Link: A four-month timeline listing pivotal events surrounding the fall of Enron is in the Online Journal at WSJ.com/JournalLinks. 

(END) DOW JONES NEWS 01-14-02 

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