NEW YORK (Reuters Breakingviews) – Takeover battles are seldom messier than when companies try to pay with stock. In the case of the battle for oil driller Anadarko Petroleum, though, an unsolicited bid from Occidental Petroleum is beating the rival bid from far larger Chevron by a mile, even taking a skeptical approach to Oxy’s prospects.
Chevron is offering $33 billion for Anadarko, three-quarters of it in shares. Oxy boss Vicki Hollub is offering a much richer $38 billion, of which half is in stock. What matters to Anadarko’s directors and shareholders isn’t just that headline number, though. They also need to weigh what each bidder is really worth on a stand-alone basis and the prospects for the merged company. After all, Anadarko investors would end up with 9 percent of Chevron following a tie-up, or 29 percent of Occidental.
What if Hollub’s bid isn’t quite what it seems? Her company was trading at roughly seven times the next 12 months’ EBITDA before the battle for Anadarko began, according to data from Refinitiv, richer than the average for the sector of around six times. And while Oxy thinks it can get more cost and capital expenditure savings out of Anadarko than Chevron can, they mostly come from one place – the Permian basin – which means putting a lot of eggs in one basket.
Assume Oxy is really worth 25 percent less than its $47 billion market value before its bid became public, or about $35 billion. And say it only achieves half of the $3.5 billion savings it has forecast. Even after paying Chevron a $1 billion break fee, Anadarko shareholders would still collect cash and shares worth 46 percent more, on paper, than the company’s stock price before the announcement of the merger with Chevron, compared with 42 percent under that deal, according to a new Breakingviews calculator.
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That makes it hard for Anadarko to do anything other than recommend Oxy’s bid, as things stand. Of course, what’s good for Anadarko’s owners may not be so great for Occidental’s. One of them, T. Rowe Price, already says it’s opposed to the combination. The emergence of Warren Buffett’s Berkshire Hathaway as a financial backer isn’t unalloyed good news for regular shareholders, either. Anadarko should jump at the bid, and hope Hollub’s investors don’t get in her way.
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