Now that there’s a bidding war for Anadarko Petroleum Corp., we all know who the big winners are: Anadarko’s executives. Oh yeah, and the shareholders, too.
It’s been a bruising 24 hours for CEO Al Walker and the board. First, it emerged the board had tweaked severance terms in favor of the c-suite just a day before Chevron Corp. announced its agreed offer. Then, on Wednesday morning, persistent suitor Occidental Petroleum Corp. weighed in with a rival bid and a letter than began sweetly enough but segued quickly to this sort of thing:
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.
Still, the promise of those giant severance payments should ease any sting of embarrassment. And Anadarko’s shareholders are now distracted by something else anyway.
Oxy’s offer comes with two big selling points. First, it’s higher. At $76 a share, it came in 20 percent above the value of Chevron’s offer at Tuesday’s close, and a whopping 62 percent premium to Anadarko’s undisturbed price. It is also 50 percent cash, versus 25 percent for Chevron’s. To put that in perspective, the $38 per share of cash Oxy is offering would cover more than 80 percent of Anadarko’s pre-bid price.
Therein also lies the key risk in Oxy’s approach.
Oxy says it made three offers that were either turned down or ignored, and CEO Vicki Hollub said on Wednesday morning’s call that the cash element had risen from an initial 25 percent to 40 percent just prior to Chevron’s bid, and now to 50 percent. Taking on Anadarko would represent, as Oxy says, a “transformational” deal; Anadarko’s market cap was just a tenth the size of Chevron’s prior to its bid but almost half the size of Oxy’s. Moreover, the amount of equity Oxy would issue – a 40 percent increase in the share count – means it needs shareholder approval (unlike Chevron). The higher risks are one obvious reason for Anadarko to have held out and for Oxy to put up more cash.
Doing that raises other risks, though. Taking Oxy’s $3.5 billion of cost and capex synergies at face value and factoring in that bothersome break-up fee, the pro-forma Oxydarko would emerge with net debt of about 2.4 times 2020 Ebitda, up from Oxy’s standalone level of less than 1 times. The risk premium on its 10-year bonds widened again Wednesday and has blown out by more than half since Anadarko was put in play:
Oxy aims to sell $10-$15 billion of assets within a year or two to address this. That’s fair enough but shows this is more of a stretch for this suitor, attaching more risk for both its own shareholders and Anadarko’s, who would end up owning 29 percent of the combined company. It also means, all else equal, buybacks would likely have to wait until 2021 at the earliest while Oxy deals with leverage. As Dan Pickering, who runs asset management at Tudor, Pickering, Holt & Co., puts it, “Oxy is making the argument that this [the deal] enhances returns, but it also delays them.”
Oxy’s stock has taken a hit, falling about 3 percent Wednesday morning and lagging the sector by about 13 percent since Chevron’s bid was announced. Even so, its implied offer as of writing this is still a fifth higher than the value of Chevron’s.
Chevron’s scale and strategic fit, however, give it ample room for maneuver. While Hollub insisted on Wednesday’s call that Oxy has more overlap with Anadarko than people say, it isn’t credible to think her company can somehow reap $3.5 billion of annual synergies while Chevron, which clearly has more overlap, can only achieve $2 billion. The logic of accepting Oxy’s synergies numbers is that Chevron can boost its own, creating room for a potentially higher bid.
Raising its bid to match where Anadarko is trading now, at just under $72, would require an extra $9 per share of cash from Chevron, or $4.5 billion. In terms of net present value, that’s more than matched by a $1 billion bump in synergies. More importantly, it would bump pro-forma net debt to just 1.1 times Ebitda, up from about 1 times under the current bid. Fully matching the synergies, meanwhile, would raise the free cash flow yield, using 2020 consensus estimates, to about 10 percent. True, Oxydarko’s 9 percent wouldn’t be much lower. But more of that cash would have to flow to creditors in the short term, rather than shareholders – and that’s before thinking about any further counter-bid if Chevron does move.
As I wrote here, much of this will come down to whose acquisition currency is stronger and able to withstand the higher risks that come with a bid battle. Oxy’s approach, touting big synergies and putting public pressure on Anadarko’s board, is an attempt to make up some of the inherent gap between its own currency and that of its rival. It has come out swinging. But if Chevron punches back, I wonder if Oxy can really go the distance.