Text size Occidental Petroleum’s decision to recut its $38 billion deal to buy Anadarko Petroleum, eliminating a shareholder vote on the transaction, amounts to poor corporate governance, according to several investors in Oxy. “We have significant concerns about the proposed deal. Occidental has characterized this as a transformational deal. Any such deal should be subject to a shareholder vote,” said John Linehan, portfolio manager of the T. Rowe Price Equity Income fund. “Absent that opportunity, our only option to register our displeasure is through our proxy vote at Occidental annual meeting. We feel that Oxy’s actions have left us no choice and our current intent [is] to vote against the board at the annual meeting” on Friday. T. Rowe Price (ticker: TROW) is one of Occidental’s (OXY) largest shareholders, with a stake of nearly 3%. It is among the most prominent critics among Occidental holders of the company’s pursuit of Anadarko (AXP). Anadarko said on Monday that its board has decided Occidental’s revised offer is better than a deal that Anadarko reached with Chevron (CVX) last month. The Anadarko board move was expected, so it is now up to Chevron to better the Occidental offer, or walk away with a $1 billion breakup fee from Anadarko. Chevron had reached a deal last month with Anadarko at $65 a share, in a mix of stock and cash. Occidental shares closed Tuesday at $59.69, up 92 cents, while Chevron was down 13 cents at $118.27. Anadarko was up 33 cents at $75.82. Editor's Choice Wall Street now sees Occidental as more likely to be the successful bidder. A Chevron spokesman declined to comment Tuesday. The Occidental offer accepted by the Anadarko board would pay Anadarko holders $76 a share, split 78% in cash and 22% in stock, versus the prior bid of $76, divided 50/50 between stock and cash. By reducing the stock component, Occidental will need to issue only about 148 million shares, just under 20% of its current share count. Keeping the figure at less than 20% means Occidental won’t need a shareholder vote, under rules at the NYSE and other stock exchanges. The transaction amounts to a merger of equals, given that Occidental and Anadarko have similar enterprise values, calculated as equity market value plus net debt. “CEO Vicki Hollub and the Occidental board’s attitude is that they will do this deal come hell or high water and damn the shareholders’ desires,” said David Katz, president of Matrix Asset Advisors, an Occidental holder who opposes the Anadarko deal. Hollub defended the company’s move on Occidental’s earnings conference call Monday, saying that Occidental was reluctant to eliminate the shareholder vote but felt that it needed to do so to level the playing field with Chevron. The Chevron offer doesn’t require a shareholder vote, so the risk was greater that the original Occidental offer could have been derailed. “We felt that our greater fiduciary responsibility from a governance standpoint for our shareholders was to make this deal happen,” Hollub said. She said the proposed merger with Anadarko would be an excellent fit, realizing at least $2 billion of savings and other benefits a year. The company said Tuesday it had nothing to add. “We firmly believe that Occidental is uniquely positioned to drive significant value and growth from Anadarko’s highly complementary asset portfolio,” Hollub said in announcing the revised deal terms. “This combination will create a global energy leader with the scale and geographic diversification to drive compelling returns to the shareholders of both companies.” Linehan said he doesn’t understand her rationale. “If the economics of this deal are so compelling, Occidental should have no cause for alarm with a shareholder vote,” he said. He and other Occidental holders like the company’s stand-alone prospects as the leading energy producer in the Permian basin, a key area for shale-oil exploration and production, as well as its chemical and pipeline assets. The company also has a solid balance sheet. “The best value in the oil patch is now Occidental.” Linehan says. “If Occidental is truly focused on shareholder value creation, we would encourage them to buy in their own shares.” Occidental stock is trading near the lowest levels reached in the past decade and is way below its 2014 peak of around $100. Occidental has suspended its stock-buyback program and isn’t expected to resume it for some time if it completes the Anadarko deal. Making such a big purchase would lead to a focus on debt reduction. Occidental will have to borrow to complete the transaction in addition to issuing $10 billion of preferred stock, paying annual dividends of $800 million, to Berkshire Hathaway (BRK.B). The insurer will also receive warrants to buy stock in the oil company. To reduce the financial risk, Occidental has agreed to sell Anadarko’s African assets to the French oil company Total for $8.8 billion, assuming the deal closes. Occidental trades for about 15 times estimated 2019 earnings of nearly $4 a share and yields 5.3%. It is valued at about six times annual pretax cash flow, an attractive figure given its mix of assets and rising production. Katz thinks Occidental is worth at least $80 a share. One potential buyer is Exxon Mobil (XOM), which has made expansion in the Permian a major corporate priority. Exxon also has one of the largest chemical businesses in the world. Newsletter Sign-up Review & Preview Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow. PREVIEW “This is poor corporate governance,” says Mark Stoeckle, manager of the Adams Funds, an Occidental holder. He says that Occidental would be eroding its financial margin of safety by taking on debt to buy Anadarko. Katz said that if oil prices, now at $61 a barrel, hit $80, the decision to combine the companies would be an investing coup given the financial leverage involved, but that higher oil prices would be great for Occidental regardless. “In that scenario, Oxy also would be a home run—without the risk,” he said. He’s not happy about what he calls Occidental’s “gift” to Berkshire CEO Warren Buffett in the form of high-rate preferred stock. The Occidental battle for Anadarko has been described by the company’s backers as a David and Goliath story, with Hollub on the verge of beating Chevron. Another characterization might be a bet-the-company deal that disenfranchises shareholders. Write to Andrew Bary at andrew.bary@barrons.com<doc-sep>Become an FT subscriber to read: Leverage our market expertise Expert insights, analysis and smart data help you cut through the noise to spot trends, risks and opportunities. Join over 300,000 Finance professionals who already subscribe to the FT.<doc-sep>Occidental Petroleum Chief Executive Vicki Hollub on Friday touted her US$38-billion deal for Anadarko Petroleum Corp. – and defended the pricey terms she negotiated with billionaire investor Warren Buffett to secure the deal without seeking shareholder approval. Hollub, 59, beat out larger rival Chevron Corp. with a long-shot bid that some Occidental investors called risky because it saddles Occidental with US$46-billion in new debt. By deftly lining up allies and cash, she put together a strategy that on Thursday prompted Chevron to withdraw. “We can operate this better than anybody else. We are the rightful owners,” Hollub said at the company’s annual general meeting. Story continues below advertisement Shareholders including T. Rowe Price, Occidental’s sixth-largest, showed displeasure by withholding votes for the board. Directors were elected with between 70 per cent and 82 per cent of votes cast, below the average 97 per cent that directors received a year ago. There were no questions asked at the meeting, which took place with fewer than 100 people in attendance and lasted less than an hour. Occidental’s shares on Friday traded at a 10-year low of US$54.70, down from US$62.35 the day before Occidental disclosed its offer for Anadarko. Several big holders have criticized Hollub’s decision to boost the cash portion of the US$76-per-share offer to a point where a shareholder vote is no longer needed. Hollub said it took just an hour and a half to reach an agreement with Berkshire Hathaway Inc.’s Buffett on the US$10-billion investment. “The timing was critical for us to close these funds,” she said. Addressing investor criticism that the Berkshire investment’s 8-per-cent dividend was too high, she said Occidental took the premium into account when calculating returns on the Anadarko purchase. Unless another suitor appears, the US$38-billion, mostly cash deal would cement Occidental’s status as the largest oil producer in the Permian Basin, the top U.S. shale field. Occidental’s global production would double to 1.4-million barrels of oil and gas per day. Hollub has promised to quickly shed most of Anadarko’s non-U.S. oil properties to focus on shale. Occidental also must absorb or sell Anadarko’s U.S. Gulf of Mexico offshore production. Story continues below advertisement With Anadarko’s nearly quarter million acres in the Permian Basin, Occidental would command 1.64-million acres of prime land in the Permian and gain access to growing shale fields in Colorado and Wyoming. The deal’s financial and operating risks have soured some big Occidental holders including T. Rowe Price and Matrix Asset Management. “On paper, at $65-per-barrel oil, the deal could be executed well. That sort of is turning a blind eye to the fact that they’re in a cyclical industry,” said David Katz, president of Matrix. Rating firm Moody’s Investors Service said Wednesday it likely would downgrade Occidental if it prevails due to the added debt that will make it harder for the company to confront a downturn in oil prices. “If you do this, you have a strained balance sheet, period,” said Christian Ledoux, investment chief at Occidental shareholder South Texas Money Management. Hollub, who has sought to buy Anadarko for two years, proved her ability to sweep away hurdles when Anadarko’s board initially agreed to sell to Chevron at a lower price. “We were not about to let that happen,” Hollub said. Story continues below advertisement She convinced Buffett to invest US$10-billion in Occidental stock to help close the deal. France’s Total SA separately agreed to buy all of Anadarko’s oil-and-gas producing assets outside the United States, including its biggest future expense, a multi-billion-dollar liquefied natural gas project in Mozambique, for US$8.8-billion.<doc-sep>
HOUSTON (Reuters) - T. Rowe Price Group Inc said on Monday it intends to vote against the Occidental Petroleum Corp board of directors because the company will not allow shareholders to vote on its bid for Anadarko Petroleum Corp, which T. Rowe Price and other shareholders oppose. FILE PHOTO: The Occidental Petroleum Corp headquarters is pictured in Los Angeles, California September 16, 2013. REUTERS/Mario Anzuoni/File Photo Several other investors also said they might vote against approving Occidental’s board of directors at the annual meeting on Friday. Occidental on Sunday increased the cash component of its $38 billion bid to acquire Anadarko, removing a requirement for Occidental shareholders to approve the deal. That move led Anadarko on Monday to name Occidental’s $76-a-share offer as superior to that submitted by Chevron Corp, requiring Chevron by Friday to revise its offer or walk away. “We don’t feel we have any choice,” said fund manager John Linehan, portfolio manager at T. Rowe Price. “We really struggle to understand the logic of not putting a transformational deal to your shareholder base.” T. Rowe Price, Occidental’s sixth largest shareholder, held 21.1 million shares of the oil company as of Dec. 31, along with 865,000 shares of Anadarko and 8 million in Chevron, which offered $33 billion for Anadarko. Occidental risks the ire of billionaire activist Carl Icahn, who has been amassing a stake in the Houston-based oil producer intending to challenge its Anadarko offer, according to sources. Icahn’s involvement throws a wild card into the merger battle, said David Katz, president of Matrix Asset Advisors, which held 241,700 shares of Occidental and 61,300 shares of Chevron at the end of April. Matrix opposes the merger and may vote against the Occidental board “to send a message,” Katz said. “We don’t think they’re correctly handling their fiduciary decisions.” Occidental Chief Executive Officer Vicki Hollub said on Monday the decision to increase the cash portion of the offer was designed to address Anadarko’s need for greater certainty the deal would go ahead. “Our objective in doing this was not at all to avoid a shareholder vote. It was to ensure we had a reasonable chance to make this happen,” she said on a conference call on Monday. “We weren’t at all on a level playing field,” she said, noting that the Anadarko board had failed for days to make a decision. It has “been a 12-day process” and “our proposal still wasn’t deemed superior, which is why we’ve yesterday submitted the increased cash offer,” Hollub said. Occidental’s bid includes a pricey financing deal with billionaire Warren Buffett, whose Berkshire Hathaway would receive preferred shares paying an 8 percent dividend. “Occidental putting in more cash is really a ploy to not have a shareholder vote,” said Christian Ledoux, investment chief at South Texas Money Management, which holds shares of Chevron and Occidental. “That’s upsetting from an investor point of view.” Ledoux opposes the merger, fearing that Occidental would go into the next oil price downturn with a debt-laden balance sheet. He has not decided how his company will vote on the Occidental proxy. It will wait to see what else develops and whether Icahn takes a stand, Ledoux said. “I would imagine there’s going to be a lot of votes against (the board) as a protest,” Ledoux said.