30th April 2019
The Battle for Anadarko
Over the last two weeks we have been closely watching the bidding war for Anadarko Petroleum (APC). Anadarkois primarily an E&P company with prized assets in the US Permian shale region, Deepwateroperations in the Gulf of Mexico, Algeria, Ghana, Mozambique, Colombia, Peru and other countries with 1.5bn of proven reserves. It also owns important pipelines and processing plants in Texas and the Western U.S.
Its presence in the Permian, together with its strong mid-stream position, makes it an attractive target for the likes of Chevron (CVX), who bid to acquire Anadarko on April 12th for a total headline price of $33bn or $65 per share, a 38% premium to Anadarko’s previous closing price. This move in turn sparked Occidental Petroleum (OXY) who had been in private discussions with Anadarko previously, to go public with a counter offer of $76 per share or a total equity value of $38bn, a $15bn premium to the price APC traded at prior to Chevron’s bid.
It is interesting to note that post Chevron’s bid, and prior to OXY’s bid, the CVX deal spread had moved into negative territory (-0.78% on April 23rd) implying that the market expected a higher bid to come into play. Since the OXY bid, while the market has speculated that CVX may come back with yet a higher bid, it has also been noted that some major OXY shareholders have been vocal about their objections to the acquisition as they do not see the premium as justified by synergies which OXY management claim are as high as $2bn per year.
In turn, CVX has been reluctant to pull the trigger, figuring that APC may prefer the CVX bid as it does not depend on approval by CVX shareholders, unlike the OXY bid which does require OXY shareholder approval. CVX bid offers greater certainty in that respect.
However, this all changed on Monday when Warren Buffet entered the scene with a deal to provide $10bn of financing to OXY in support of their bid. The financing will be in the form of preferred stock OXY will issue to Berkshire Hathaway. As is customary in deal with Mr. Buffet, his funding is contingent on the deal closing, and he also will receive long term warrants to purchase OXY shares at a slight premium to the current price. All in all the package he is receiving is estimated to be worth $12bn, and gives him the ability to participate in any upside generated by the OXY/APC combination. The deal with Buffet is also very clever as it gives OXY and option to reduce the stock component of its offer for APC, and thus eliminating the need to hold a shareholder vote. Will this be enough to bring CVX back into the ring? Will they raise their offer to $80? They have four days to decide under the terms of their agreement with APC. As of right now, the OXY/APC deal spread stands at 1.17%, and the CVX share price has traded higher. One could take this to mean that OXY will win the day, however in our view the spread is now too narrow and could indicate the chance that a higher bid is forthcoming.