Please ensure Javascript is enabled for purposes of website accessibility

Why Dynegy Inc's Shares Popped 15% Today

By Travis Hoium – Oct 30, 2017 at 12:11PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A merger could help short term, but won't change the competitive dynamics endangering Dynegy Inc. in the first place.

What happened

Shares of wholesale power producer Dynegy Inc. (NYSE: DYN) jumped as much as 14.8% in early trading Monday after announcing it is merging with Vistra Energy Corp. (VST -0.57%). At 11:20 a.m. EDT shares were still up 10.3% on the day.

So what

The two energy companies will join forces with Dynegy shareholders getting 0.652 shares of Vistra Energy for each share of stock. At the end of the day, current Vistra shareholders will own 79% of the company and Dynegy shareholders will own 21%. While Dynegy's stock is up on Monday, Vistra's shares are down 4.4%, so the reaction isn't all positive for shareholders.

Coal power plant with smoke billowing into the air.

Image source: Getty Images.

Big drivers of the merger are anticipated synergies and other cost savings. The press release announcing the deal anticipated $350 million in annual run-rate EBITDA that could be added through lower administrative costs and operational improvements across the fleet.

Now what

Dynegy's problems haven't been costs, they have been low wholesale prices that are squeezing margins across the industry. This merger won't do anything to change low natural gas and renewable energy prices that have driven the low wholesale prices, so I don't think it will add much value for investors either. Consolidating power in the generation industry is a trend that will likely gain steam as companies face financial hardship, but consolidation won't fundamentally improve the industry's outlook, no matter how big Dynegy's pop was on Monday.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.