Why Occidental Added More Cash to Offer for Anadarko

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The board of directors of Occidental Petroleum Corp. (NYSE: OXY) on Sunday announced that it had revised its offer to acquire Anadarko Petroleum Corp. (NYSE: APC) by boosting the cash portion of the deal from 50% to 78% to holders of Anadarko shares. Based on the $38 billion cash and stock offer as first proposed, the cash end of the deal has gone up from around $19 billion to nearly $30 billion.

The increase reflects an investment of $10 billion from Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A), announced last Tuesday. Buffett’s investment in Oxy is contingent on winning the battle Oxy is currently waging with Chevron Corp. (NYSE: CVX) for the right to acquire Anadarko. Chevron’s bid amounted to $33 billion paid as 25% cash and 75% Chevron stock.

As we noted last week when the Buffet cash investment with Oxy was announced, Buffett is getting a pretty sweet deal. In addition to 100,000 preferred shares valued at $100,000 each, Buffett has an option to buy 80 million common shares at $62.50. What is unstated here is that Oxy hopes (expects?) Buffett to exercise that option as soon as possible after the acquisition closes.

Under Oxy’s latest offer, shareholders would receive $59 in cash and 0.2934 shares of Oxy stock for each Anadarko share. The Chevron offer includes $16.25 in cash and 0.3869 shares of Chevron stock for each Anadarko share.

The Chevron offer was accepted when it was announced, and so far Anadarko’s board has continued to back its original position. Oxy’s initial offer was not rejected out of hand, but the Anadarko board said it would review the deal because it could “reasonably be expected to result” in a better deal. Oxy’s latest offer involving more than three times the cash of the Chevron deal, combined with Buffett’s cash infusion and an announced deal to sell its assets in Africa may be too good to pass up.

Oxy also announced Sunday that it has agreed to sell its assets in Algeria, Ghana, Mozambique and South Africa to French supermajor Total S.A. (NYSE: TOT) for $8.8 billion. Oxy owns a 26.5% working interest in and is the operator of a massive liquefied natural gas (LNG) project in Mozambique. As of December, the proposed project had received sales agreements for about 7.5 million metric tons of LNG of a projected 9.5 million tons in annual production. The sale is contingent on Oxy completing its acquisition of Anadarko.

In her letter to Anadarko’s board, Oxy CEO Vicki Hollub also noted one other change:

Our revised proposal does not require an Occidental shareholder vote, which has been repeatedly cited as the explanation for why you previously chose Chevron’s $65 offer over our $76 offer.

Oxy is acting like it’s in a fight for its life. At Friday’s close, the company’s market cap was $43.34 billion, less than 20% more than Anadarko’s, but only about a quarter of Chevron’s $223.39 billion. Could Chevron just make Oxy shareholders an offer they couldn’t refuse, provided the Anadarko offer drops off the table? That might be a stretch, even for Chevron, but it could happen. At least it would throw the whole Permian Basin Easter egg hunt into a tizzy and that might be enough for Chevron to pick up Anadarko, or even Oxy.

Anadarko stock traded up about 2.8% in Monday’s premarket, at $74.75 in a 52-week range of $40.40 to $76.70.

Occidental stock traded down about 1.4% to $57.15, in a 52-week range of $56.83 to $87.67. Oxy also announced first-quarter results this morning that beat consensus estimates on both the top and bottom lines.

Chevron traded up about 0.3%, at $117.60 in a 52-week range of $100.22 to $131.08.


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