The proverb about a bird in the hand being worth two in the bush has generally served investors well. Many long-suffering shareholders of Dynegy, America’s third-largest independent power producer, thus embraced last year’s buy-out offer by Blackstone Group at $5.00 a share given the company’s precarious leverage. But two hedge funds controlling about a quarter of the company felt the fowl on offer would have been woefully scrawny after Blackstone finished plucking it clean.

One of the shareholders, run by corporate raider Carl Icahn, took matters into its own hands by successfully trumping Blackstone with a $5.50 cash offer. Another, Seneca Capital, led resistance even to this higher bid and insisted that Dynegy was undervalued at $6.00 or more. The deal’s collapse, the departure of senior management and the company’s announcement on Tuesday that it might need to consider bankruptcy protection if debt covenants cannot be renegotiated brought another animal proverb to mind: bulls make money, bears make money and pigs get slaughtered.

The hold-outs may have a point though. Going concern language makes the debt situation seem overly dire. With little secured debt and no imminent bond maturities, equity investors probably can stave off liquidity woes and roll the dice on a recovery in deeply-depressed power margins. Leverage cuts both ways so a modest improvement could produce outsized returns on Dynegy’s sliver of equity. Meanwhile, excess cash could be used to repurchase bonds now well below par.

This is the sort of calculated bet hedge funds, but not widows and orphans, can and probably should make. The latter can sell today at a slight premium to Mr Icahn’s offer or stick along for the ride. If they do, it must be with the understanding that a deterioration in debt and commodity markets will cause potential saviours like Blackstone to fly the coop.

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