The $5.50-a-share deal has come under fire from hedge fund Seneca Capital, which led a similar effort to oppose the company's previous deal to sell itself to private equity firm Blackstone Group
Given Dynegy's cash flow position, we believe there are serious questions as to whether Dynegy will have sufficient liquidity available to reach eventual market recovery, the special committee of Dynegy's board of directors said in a letter to the company's shareholders, obtained by Reuters.
Dynegy, which sells power at competitive rates into the open market, is trying to sell itself in the face of weak natural gas prices, which often dictate power prices.
But Seneca has said that management has consistently undervalued the company, and is arguing that Dynegy is worth $7.50 to $8.50 a share. Dynegy shares closed at $5.74 on the New York Stock Exchange on Thursday.
The Dynegy directors argued in the letter that accepting the Icahn bid was superior to the risks of remaining an independent company.
They also asserted that Seneca had made various errors in its presentation materials and called some of the assumptions behind Seneca's valuation exceedingly wishful.
When Blackstone made its original $4.50-a-share bid for Dynegy last year, the company's shares were below $3. Natural gas oversupply has driven down the value of the fuel.
Icahn extended his tender offer for Dynegy on Thursday, saying he needed more time to receive approval from the Federal Energy Regulatory Commission (FERC).
Dynegy said later on Thursday that FERC had approved the proposed deal and that all regulatory approvals needed to complete the tender offer have now been received.
Only about 4.4 percent of Dynegy's shares have been tendered into the bid.
Icahn has struggled to win over shareholders for his bid because investors have been betting that there is more value in the company either on a stand-alone basis or through a higher offer. The company's shares have mostly traded above the bid since the deal was agreed to in December.
Seneca has already put Dynegy Chief Executive Bruce Williamson in its cross hairs, launching a campaign to have him and another director replaced on the company's board.
The hedge fund could not immediately be reached for comment.
(Reporting by Michael Erman; Additional reporting by Megan Davies; Editing by Gary Hill)