Not so fast, Chevron.
Last month, Chevron (NYSE: CVX) unveiled plans to acquire Anadarko Petroleum (NYSE: APC) for $33 billion in cash and stock. Anadarko execs signed on the dotted line, agreeing to a $1 billion breakup fee should the deal be scuttled for any reason. That was a mistake, particularly knowing there was another interested suitor.
A few days ago, a Gulfstream corporate jet owned by Occidental Petroleum (NYSE: OXY) touched down in Omaha, Nebraska, home of Warren Buffett. It could have been a mere coincidence -- but it wasn't. Behind the scenes, Buffett was orchestrating a financial package to help Occidental outbid Chevron for Anadarko.
Occidental, one of the portfolio holdings in my High-Yield Investing premium newletter, has since come forward with an offer of $76 per share, or $38 billion. That's not only more generous than Chevron's $65 bid, but it also has a higher cash component (50% versus 25%). While Anadarko has rebuffed previous advances from Occidental, in part because of concerns that OXY shareholders might balk, it has no choice but to seriously consider this offer.
So how does Warren Buffett fit in? Well, Berkshire Hathaway (NYSE: BRK-A) has agreed to bankroll $10 billion toward the cost. In exchange, Berkshire will walk away with 100,000 preferred shares worth $100,000 each at a fixed 8% coupon, as well as warrants to purchase common shares in a private offering. The deal is contingent upon the merger with Anadarko closing.
This isn't cheap funding. The preferred shares will earn $800 million in yearly interest -- a coup for Berkshire stockholders. Buffett has a knack at engineering these types of financial arrangements. Still, Occidental needs the cash to persuade Anadarko that it can close the deal.
Plus, it never hurts to have Buffett's personal endorsement.
The total price tag comes to $57 billion including the assumption of debt. That's a substantial premium. Before this bidding war started, APC had an enterprise value of around $40 billion and its shares were trading in the mid-$40s.
But that illustrates the value of prized Permian Basin acreage. Occidental already has 10,000 producing wells in these fertile West Texas shales. Taking control of Anadarko would double its production to 1.4 million barrels per day and add nearly a quarter million acres of potential drilling targets.
This is still a fluid situation. Chevron is five times larger than Occidental and has the financial firepower to counter with a higher offer. Thus far, it appears unwilling to spend any more. But it could sweeten the bid marginally and potentially still sway Anadarko's board (which sees less risk with Chevron).
But neither company wants to be seen as undisciplined.
Even with great assets, overpaying for an acquisition can be a sure way to destroy shareholder value. The question is where to draw the line. By its own calculations, Occidental expects to reap more cash-flow synergies from the tie-up -- about $3.5 billion per year in cost savings and capital reductions.
That means it can pay a bit more than Chevron and the deal would still be accretive to earnings.
Action to Take
At $57 billion, Occidental would be paying an Enterprise Value/EBITDA multiple of around 8. That's quite reasonable, although the shares have dipped on the proposal, which is common for an acquirer.
The deal would still need the approval of shareholders (and some institutional owners like T. Rowe Price have expressed reservations). But it has the potential to be a powerful growth catalyst. The Permian Basin accounts for one-third of the country's oil production, and management believes the synergies could lead to "accelerated" dividend growth.
If the deal isn't consummated, Occidental itself might be a prime takeover candidate. Either way, I see good things ahead for stockholders, which is why we continue to hold this 5% yielder in the High-Yield Investing portfolio.