Bankers enjoy another windfall as energy firms unload bad

After making billions in fees helping energy companies gobble up rivals and finance their projects when the business was booming, Wall Street investment banks are cashing in again. This time, they are helping many of the same companies, now desperate for cash, sell some of those same properties.

Earlier this month, Lehman Brothers helped arrange for Dynegy to sell a pipeline that Lehman had advised Dynegy to buy from Enron last fall -- a round trip, as they say on Wall Street. Lehman Brothers stands to make about $2 million on the deal, which helped Dynegy avert a bankruptcy filing, on top of about $5 million it made the first time around.

The day before, Aquila, another debt-ladden energy trader, announced that it would sell the British company Midlands Electricity -- a business it had acquired just three months earlier for $2.1 billion. Deutsche Bank made about $8 million for advising Aquila to buy the company. Aquila has now appointed Credit Suisse First Boston to help it sell the business, probably for less than it paid, and Credit Suisse stands to make several million dollars if the sale is completed.

Some energy executives say the banks are getting rich on the backs of battered companies that they helped push to the brink.

"Many of these deals were massive failures that have traded two or three times, each time for less," said Karl W. Miller, a former executive at Enron, the El Paso Corp. and Pacific Gas & Electric and now an industry consultant. "Each time the banks get paid. There's no free lunch."

Executives at leading investment banks, including Lehman and First Boston, declined to comment by name about the round-trip deals, saying they did not want to be associated with any discussion of the topic. Privately, they note that Wall Street firms often assign scores of bankers to potential deals for months and even years, only to see them collapse at the 11th hour.

"Our fees are always at risk," said the head of a major investment banking group on Wall Street. "To think that we're overcharging is an unfair accusation. And the idea that we're now making money off deals gone wrong is also unfair."

The energy industry is not the only one in which investment banks have benefited on the way up and again on the way down. The troubled telecommunications sector, with many of the same problems that confront energy companies, is ready for a new round of asset sales. With so many companies out of business, however, there are fewer buyers.

Goldman Sachs was recently appointed to advise the struggling Deutsche Telekom on a possible sale of its U.S. cellular telephone unit, Voicestream. Goldman Sachs knows Voicestream well; it was the financial adviser in 2000 when it sold the business to Deutsche Telekom for $50 billion.

That deal made Deutsche Telekom one of the most highly indebted telephone companies in Europe. Its credit rating and stock fell -- and eventually, so did the deal's biggest proponent, Deutsche Telekom's chief executive, Ron Sommer, who was ousted last month. Goldman Sachs collected $60 million in fees for helping to broker the original deal.

Goldman Sachs executives declined to comment on their dealings with Deutsche Telekom.

Deal making is, of course, what Wall Street does. But with one collapse after another in the energy and telecommunications industries, the bankers' business-as-usual has raised fresh questions. Congressional critics have condemned the banks as having conflicts of interest and helping create a deceptive boom that flooded capital into industries unable to absorb all the new players and capacity.

For their part, once-stodgy utility companies watched avidly as investors piling into energy and Internet companies like Enron or Global Crossing that touted their unlimited growth prospects.

"It is safe to say that many of these companies' strategies were driven by a kind of Enron envy that Wall Street was more than willing to facilitate," said Paul Patterson, an independent energy analyst who has worked for Credit Suisse First Boston and ABN Amro.

In the energy boom, from 1999 through 2001, investment banks advised on more than 400 energy mergers and acquisitions worth more than $1 trillion, according to Thomson Financial. Morgan Stanley, the top energy adviser in that period, advised on 46 deals worth $224 billion, reaping billions in fees.

Many of those banks also began lending energy companies hundreds of billions of dollars in the late 1990s to finance huge infrastructure projects. J.P. Morgan Chase alone lent more than $170 billion to energy companies from 1999 to 2001, significantly raising the debt obligations of companies including Enron, Calpine and AES.

The bankruptcy of Enron and the ensuing crisis in the energy trading industry have lowered the prices of energy stocks and caused unsympathetic agencies like Standard & Poor's to lower their ratings across the board. Those rating cuts have created a liquidity crisis for the companies, taking away their access to new loans to help finance their debts. That has forced the companies to start selling assets or risk going bankrupt.

The Williams Cos., Duke Energy and CMS Energy are among dozens of utilities now selling assets that they acquired only last year on the advice of bankers. El Paso, a client of Credit Suisse First Boston that was still acquiring companies as recently as six months ago, has turned into a motivated seller. El Paso just announced plans to sell $2 billion of assets, including production and power facilities.

More than $10 billion worth of energy assets are for sale. That means Wall Street investment banks, starved for deals in just about every other industry, stand to make more than $50 million from the battered energy sector, based on fees that typically range from 1 to 7 percent of the value of a deal.

Copyright 2002
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