The fight between Occidental Petroleum Corp. (NYSE: OXY) and Chevron Corp. (NYSE: CVX) to acquire Anadarko Petroleum Corp. (NYSE: APC) just took a serious turn. Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) have committed to invest $10 billion in Occidental as part of the deal financing to acquire Anadarko.
While this is a game-changer that could more firmly tip the Anadarko board toward Occidental, Tuesday’s press release showed that the investment is contingent upon Occidental entering into and completing this proposed acquisition of Anadarko. In short, if Chevron wins out, then Occidental Petroleum gets no $10 billion investment from Buffett, who may be more interested in bank stocks than share buybacks.
As part of the deal, if consummated, Berkshire Hathaway will receive 100,000 shares of Cumulative Perpetual Preferred Stock with a $100,000 per share liquidation value. The kicker is that Berkshire Hathaway also will receive a warrant to purchase up to 80 million common shares of Occidental Petroleum with an exercise price of $62.50 per share. That compares with a prior close of $60.10 and a 52-week trading range of $56.83 to $87.67.
Where this deal gets interesting is that the Occidental preferred shares will accrue dividends at 8% per year. If the dividends are accrued and unpaid, then it will be at 9% per year. The preferred stock and the warrant are being issued and sold in a private offering.
Buffett is no stranger to making merger financing proposals of this sort, but the rate at which Occidental is having to borrow would imply that the company wants and expects Berkshire Hathaway to convert the shares quickly. Otherwise, investors are going to ask whether Occidental should have just issued convertible debt in the market, as it probably could have done so at a more favorable rate.
Occidental’s current proposal to acquire Anadarko for $76 per share was broken down as $38 per share in cash and 0.6094 shares of Occidental’s common shares for each common share of Anadarko. Anadarko’s board of directors has now determined that the Occidental proposal “could reasonably be expected to result in a superior proposal under its existing merger agreement and that it would engage” with Occidental.
Additional details of the preferred shares were listed as follows:
The preferred stock to be issued to Berkshire Hathaway will be redeemable for cash (in whole or in part) at the option of Occidental commencing on the tenth anniversary of issuance at a redemption price equal to 105% of the liquidation preference plus accumulated and unpaid dividends, if any. The preferred stock will also be mandatorily redeemable for cash (in whole or in part) upon certain specified capital return events. Dividends will be paid in cash or, at Occidental’s option, in shares of Occidental common stock. The warrant to be issued with the preferred stock may be exercised in whole or in part and from time to time, until one year after the redemption of the preferred stock.
Vicki Hollub, president and chief executive officer of Occidental, said of the pact:
We have long believed that Occidental is uniquely positioned to generate compelling value from Anadarko’s highly complementary asset portfolio. We are thrilled to have Berkshire Hathaway’s financial support of this exciting opportunity. We look forward to engaging with Anadarko’s Board of Directors to deliver this superior transaction to our respective shareholders.
Shares of Occidental Petroleum were last seen down 3% at $58.33 early Tuesday. Chevron shares were trading up more than 3% to $121.61.