Goldman, Morgan Part of Group Seeking Dominion Assets

NEW YORK Jan 24, 2007 (The Wall Street Journal via Dow Jones Newswires)

It might not be on par with Luke Skywalker joining Darth Vader to rule the universe, but two historic Wall Street adversaries are combining forces to crack a huge deal in the energy sector.

The investing arms of Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) are quietly collaborating on a massive private-equity play for the oil-and-gas assets of utility company Dominion Resources Inc. (D) - a deal that could top out at $15 billion, people familiar with the matter said.

The collaboration of the two elite securities firms, both big players in the energy space, is an unmistakable reminder of how private equity is changing life on Wall Street. Across the Street, banks are angling to become both competitor to and collaborator with buyout shops. These shops are eager to wager billions of dollars in areas - such as large-scale oil-and-gas exploration - they have traditionally avoided.

In the case of Dominion, both Goldman Sachs and Morgan Stanley are part of a mega-consortium of private-equity players that include Madison Dearborn Partners, Warburg Pincus, First Reserve, Carlyle Group and its affiliate Riverstone Holdings (AP4.SG). A second group composed of Blackstone Group, Texas Pacific Group, and Kohlberg Kravis Roberts & Co. is exploring its own offer, people familiar with the matter said.

Spokesmen for Goldman and Morgan declined to comment. A spokesman for Dominion didn't return a request for comment.

Goldman and Morgan have invested together previously, largely in a series of small technology investments during the dot-com era and in a Chinese insurer back in 1994. But their investing arms took markedly different tracks in recent years, with Morgan Stanley largely exiting from the business in 2004, and Goldman pouring billions to bring the likes of caterer Aramark Corp. and pipeline operator Kinder Morgan Inc. under private control.

Such collaborations are more likely now that Morgan Stanley has gotten back in the private-equity game under Chief Executive John Mack, even hiring a former Goldman executive to lead the effort. And though bankers at each firm are eager to harp on rivals' foibles and even clothing choices, people close to both firms portrayed their joint effort with intense nonchalance.

It isn't clear whether any private-equity buyer will ultimately succeed, given the dynamics of an auction begun last year after the Richmond, Va., company decided to concentrate on its core utility business and sell the majority of it oil-and-gas extraction assets.

Private-equity money has been around the exploration and production space for decades, although generally as seed money to back management teams looking to build up an energy company. No private-equity firm has gone after as large a target as the Dominion assets. A deal would rival such recent energy acquisitions as Anadarko Petroleum Corp.'s $16.4 billion purchase of Kerr-McGee Corp. last year and Chevron Corp.'s $18 billion acquisition of Unocal Corp. in 2005.

There is plenty of risk in the energy space. Private-equity buyers try to exit from their initial investments within a three- to five-year span, which essentially means that a buyer would be making a bet that energy prices won't nosedive. Oil's sharp decline from last summer's highs and the steep drop in natural-gas prices last fall are reminders of how volatile commodity prices can be.

"Private-equity firms have a lot more access to debt capital than at any time in history," said Thomas S. Glanville, managing partner of private-equity firm Eschelon Partners in Houston. He said that private buyers would probably make money by hedging away as much risk as possible in Dominion's proven stream of reserves. Profits would then flow from the assets' "probable and possible" reserves.

Dominion has in recent weeks been talking to the private-equity groups, hoping to wring out a price that would allow the assets to be sold in one piece. Domestic natural-gas assets, similar to what Dominion is selling, are in high demand right now. But Dominion's assets are so disparate that few traditional exploration and production companies would be interested in the whole package.

The company may thus be able to find a better total price by breaking up the unit into three pieces: off-shore, on-shore and Canadian. Analysts said companies such as Occidental Petroleum and XTO Energy Inc. likely would be natural buyers of the Permian Basin assets, while Chesapeake Energy Corp. is a likely bidder for Dominion's Oklahoma gas fields. The Rockies, deep-water Gulf of Mexico and Canadian assets could draw interest from a number of companies. Chesapeake declined to comment, while Occidental and XTO didn't return calls for comment.

But a piecemeal sale would take longer and run the risk that energy prices could drift down over the summer, lowering both interest and the value of offers.

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