Activist investor Carl Icahn is suing oil company Occidental over what he feels is a ‘fundamentally misguided’ deal to buy Anadarko Petroleum. He has slammed the management for “bet-the-company” acquisition for a ‘sky-high’ price and feels Oxy should’ve put itself up for sale instead.
As previously reported, Oxy in May reached a deal to buy rival Anadarko Petroleum in a deal worth $38 billion, squeezing out Chevron from the race. Chevron did get a consolation prize in the form of $1 billion breakoff fee from Anadarko, under the terms sealed before Oxy has announced its offer.
Icahn, 83, a billionaire whose net worth has been estimated at around $20 billion, is suing Oxy in a push to get access to certain books and records of the company, “relating to its fundamentally misguided and hugely overpriced acquisition of Anadarko Petroleum Corporation after a bidding contest between the Company and Chevron.”
“Unfortunately for the stockholders of Occidental, [OXY] won that contest even though Chevron is approximately six time’s Occidental’s size (with Anadarko being only slightly smaller than Occidental), with its financial strength Chevron could have matched Occidental’s winning bid and won the contest for Anadarko (it held matching rights) but refused to do so” the text of the suit reads.
As reported on May 9, Chevron said it wouldn’t be raising its initial bid for Anadarko, with Chevron CEO Michael Wirth saying: “Winning in any environment doesn’t mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal,”
‘Oxy ballooning debt burden instead of shareholder value’
Citing Wirth’s statement on value erosion and Chevron’s reasoning behind dropping the Anadarko pursuit, Icahn-led plaintiffs said in the suit: “The same was true for Occidental—but the Occidental board and management took the diametrically opposed approach. They decided to go for growth-at-all-costs at the price of ballooning the company’s debt burden, rather than trying to maximize stockholder value prudently.”
Plaintiffs further said: “A board of directors giving priority to stockholder value would not have approved the Company’s very high topping bid for Anadarko because most of that price will be paid for with debt (and debt-like preferred stock), thus putting the Company at risk in case oil prices fall in the near to intermediate future. Oil prices, of course, are constantly rising and falling—no board or management team can confidently predict where prices will go in the future.”
Icahn has slammed the ‘sky-high’ price for Anadarko, it has also criticized the board for striking a deal with Total to sell Anadarko’s assets in Africa, and for agreeing to $10B stock sale to Warren Buffett’s Berkshire Hathaway. Furthermore, Icahn has accused the company of seeking to avoid the shareholder vote on the deal “at almost all costs,” out of fear the deal might be voted down.
The Plaintiffs said:”… not only was the purchase price sky high, and not only did the intrinsic value of Anadarko decrease during the bidding contest (among other things, Anadarko was forced to pay a $1 billion termination fee to Chevron) but Occidental’s financing costs were astronomical as well.”
Icahn slams deal with Buffett, lack of stockholder vote
The Icahn group said that the Occidental board and management team agreed “to extraordinarily and unnecessarily expensive financing while trying to raise the cash necessary to top Chevron’s (mainly stock) bid.”
“The financing, which included at least the sale of $10 billion of preferred stock to Berkshire Hathaway on extremely disadvantageous terms, and the pre-sale of Anadarko’s African assets to Total, in what appears to have been a one-bidder auction that is now in doubt, raises very real questions about the competence, and fidelity to the stockholders, of Occidental’s management and the board.
“This is particularly true because the $10 billion preferred stock sale was expressly accomplished in a manner in which the New York Stock Exchange rules would not—at least according to the Company if not the text of the rules— require a vote by the Company’s stockholders, and management wanted to avoid a vote at almost all costs,” the plaintiffs said.
“The truth about the Berkshire deal was that Occidental agreed to it because it was..desperate for the money because it desperately wanted to show that its bid for Anadarko was credible. A bit of research would have shown that Berkshire has long been known for opportunistically profiting off desperate companies,” the Icahn plaintiffs said.
“The truth about the Berkshire deal was that Occidental agreed to it because it was..desperate for the money because it desperately wanted to show that its bid for Anadarko was credible.”
“Going out and selling preferred stock at an extremely low price in order to avoid a stockholder vote that would be required if common stock were to be issued instead, raises serious questions of the board’s fidelity to the stockholders.”
Plaintiffs, who own $1.6 billion worth of Oxy stock, said: “Management appears to find the idea of a stockholder vote objectionable. Yet, the Anadarko deal is a classic “transformative” (a word that should send shudders through stockholders everywhere) bet-the-company deal, which is exactly the type of deal that management should present to the stockholders for approval.
“The oil industry is notoriously volatile. Oil and gas prices go up and down suddenly and no oil company can successfully predict where they will go, or when they will go, next. Indeed, for precisely that reason, Occidental management had been saying as recently as the company’s February 2019 earnings call that it did not need to pursue any large M&A deals and that capital discipline was extremely important.”
‘Firesale’ to Total, and ‘epic blunder’ in Algeria
As previously reported, Oxy had agreed to sell all of Anadarko’s Africa assets for $8.8 billion even prior to striking the final deal with Anadarko.
Icahn feels the deal was done hastily in a sort of ‘firesale’ to Total and should’ve been done in an “asset by asset” auction process to maximize the value.
“Some potential bidders might have been interested in the Mozambique gas fields, but not Ghana or Algerian oil, while others might have been interested in the Algerian assets but not in Mozambique. An asset-by-asset auction process can be designed to maximize total proceeds by nimbly placing individual assets with the highest bidders. Instead, by selling all Anadarko’s varied African assets in a single sale to a single buyer, it is inconceivable to believe that Occidental maximized value,” the Icahn group said.
Icahn also stressed that the Total deal has recently hit a stumbling block, as apparently, nobody asked the Algerian government on Anadarko’s sale of assets there to total, and the government said it would block the sale.
“Occidental’s management had to know that it could not sell, or presell or whatever it believes it has done, Algerian oil assets (much less someone else’s Algerian oil assets) without Algerian assent.”
The Icahn group added: “…Had Occidental done the least bit of due diligence, it would have known that Anadarko (and other western oil companies) have always had to tread very carefully with the Algerian authorities. Anadarko’s current agreement with Algeria came only after years of very difficult negotiations.
“Occidental’s management had to know that it could not sell, or presell or whatever it believes it has done, Algerian oil assets (much less someone else’s Algerian oil assets) without Algerian assent. Yet apparently Occidental did not even give a nod to the Algerian government. It was an epic blunder, and it will likely cost the stockholders a fair penny to fix.”
Icahn: Deal might still work but.. it is an enormous bet
Plaintiffs have said that the deal was “little more than an enormous bet on the price of oil.” Icahn feels that if oil prices increase from current levels, and stay there for a number of years, “then management’s deal might work (if the actual combination of the two businesses is competently and prudently accomplished— something that appears to be far from guaranteed under the present stewardship).“
“If oil prices go down to $45 a barrel or lower, however, the Plaintiffs believe that there is a substantial risk that Occidental may have to cut the dividend on its common stock, and Occidental’s current $3.12 annual dividend is one of the prime reason stockholders buy the stock,” the plaintiffs said.
‘Oxy should have put itself up for sale’
Icahn said Oxy should’ve put itself up for sale instead of buying, as it is apparently Anadarko’s Permian assets in the U.S. that had attracted Chevron.
“Occidental’s biggest mistake, however, has to be the board’s and management’s failure to understand (or willful rejection of the fact) that at present market prices Occidental should have been a seller — not a buyer,” the Icahn group said.
“Occidental has an even stronger Permian position [compared to Anadarko’s] and there is little doubt that it could have attracted strong and competitive bids at a premium to its stock price. That would have been the stockholder friendly thing to do,” the Icahn plaintiffs said.
Push to oust directors
Now, the plaintiffs might also seek consents from other shareholders to convene a special shareholders meeting and potentially elect new directors “to ensure that Occidental is being run in the interests of its stockholders going forward, and not in the interests of directors and officers who appear to be interested in growth for growth’s sake.”
Describing the purpose behind the wish to review Oxy’s documents – for which it is seeking the court approval – the plaintiffs said they wanted to learn more on which other parties were contacted other than Berkshire Hathaway for the financing, if there was any bidding process for the African assets sale to Total, and how many other proposals were there if any, and to learn whether the company had received expression of interest from any third party over a potential said.
“The Icahn Parties intend to use this information to (1) decide how they should proceed (including whether to bring litigation on behalf of themselves or the Company); (2) decide whether to seek to call a special meeting of stockholders for the purpose of removing and replacing incumbent directors; and (3) in the context of seeking to call a special meeting of stockholders, to potentially share some or all of the information they receive with their fellow stockholders,” the Icahn plaintiffs said.
Responding to Icahn’s statement, Oxy issued the following statement:” Occidental is committed to maximizing long-term value for all shareholders, and our Board and management team continually evaluate opportunities to that end. Our acquisition of Anadarko will create a global energy leader with a highly complementary asset portfolio and a unique opportunity to deliver compelling value and returns to the shareholders of both companies, including significant cost and capital allocation synergies and near-term cash flow accretion. We look forward to completing the transaction in the coming months. With respect to the suit seeking access to certain “books and records” of Occidental, we will respond in due course.
Offshore Energy Today Staff
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