Occidental Bids Anadarko Petroleum (APC)
Having grown into the No.1 operator in Permian in 2018Q4, Occidental definitely don’t want give that title back to Chevron.
While acquiring Anadarko is an add-on for Chevron, it’s much more financially challenging for Occidental.
Occidental produces at a similar scale as Anadarko. So it’s presumably an acquisition that would double its size.
But Occidental moved decisively. It offered $76.00 per share for Anadarko on April 24, 12 days after Chevron’s announcement, with ~17% premium over the $65 per share agreement. Taking into account the stock price movement, Occidental’s deal presents a ~20% premium.
Occidental’s offer also has more cash component (50/50) – $38.00 in cash and 0.6094 shares of Occidental common stock per Anadarko share, valuing Anadarko at $57 billion.
Occidental also argues a $3.5 billion free cash flow improvements through synergies and capital reduction, compared with Chevron’s $2 billion / year synergies.
Occidental actually tried to acquire Anadarko earlier in April, according to the press release later on.
It is unfortunate that Anadarko agreed to pay a break up fee of $1 billion, representing approximately $2 per share, without even picking up the phone to speak to us after we made two proposals during the week of April 8 that were at a significantly higher value to the transaction you were apparently negotiating with Chevron.
We noted to you on April 8 that our due diligence is complete. As you are aware, our financial advisors are BofA Merrill Lynch and Citi, and our legal advisors are Cravath, Swaine & Moore LLP, and we and they are available to discuss any aspect of our proposal. We and our advisors have reviewed your merger agreement with Chevron. We are separately sending to you and your legal advisors a form of merger agreement on that basis which we would be prepared to enter into, subject to our agreeing to the disclosure schedules to be attached, together with a copy of our financing commitment letter.
Financing The Acquisition
Acquisition of this size is difficult for Occidental, especially as it offers much more cash than stocks.
In 2018, Occidental generated $7,669 million operating cash flows with $(4,975) million CapEx. It also paid $(2,374) million in cash dividend and bought back $(1,248) million stocks.
On its balance sheet as of the end of 2018, it had $3,033 million cash, and $10,317 million long-term debt.
On April 30, $10 billion financing was secured as Buffett came on board.
Berkshire Hathaway, Inc. has committed to invest a total of $10 billion in Occidental. The investment is contingent upon Occidental entering into and completing its proposed acquisition of Anadarko. Berkshire Hathaway will receive 100,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share, together with a warrant to purchase up to 80.0 million shares of Occidental common stock at an exercise price of $62.50 per share.
The preferred shares also have a dividend rate of 8% per year.
As WSJ describes, the investment “is straight out of Warren Buffett’s playbook“. During and after the financial crisis, Berkshire acted as a lender of last resort for blue-chip companies including Goldman Sachs, General Electric and Bank of America.
Occidental marks Berkshire’s largest purchase of preferred shares; the 2013 Heinz deal has $8 billion preferred stocks and other securities.
Mr. Buffett and Occidental have some shared history.
Mr. Buffett’s first stock purchase was three shares of Cities Service preferred stock when he was 11 years old. Occidental’s chief executive, Vicki Hollub, started her career at Cities Service, which was later acquired by Occidental. Cities Service is now called CITGO Petroleum Corp. and owned by Venezuela’s Petróleos de Venezuela SA.