The Bidding Battle for Anadarko: Two Offers On The Table

It all began on April 12th, after Chevron's $33 billion bid for Anadarko was accepted by the company. At the time, Anadarko was rumored to be in talks with Occidental, only for Wall Street to be greeted by the news of Chevron's successful bid. What seemed like a done deal was rocked again on April 24 after Vicki Hollub, Occidental's Chief Executive, unveiled her fourth attempt to acquire Anadarko for $38 billion.

"Dear Anadarko Board:... It is unfortunate that you agreed to pay a breakup 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..." — Vicki Hollub, CEO, Oxy"

The sixth-largest oil and gas M&A deal in history and the largest deal since Shell bought BG for $82 billion in 2015 to become a global LNG powerhouse, has been disrupted, as Occidental Petroleum kicked off a bidding war for Anadarko and if the proposal is accepted, the Oxy bid would jump over BP/Amoco to become the fourth-largest upstream oil & gas deal in history before any inflation adjustment.

Oxy is offering $76 per share for Anadarko, split evenly between cash and equity. Based on April 23rd closing prices this represents a $38 billion offer, including debt the deal is valued at $57 billion. Oxy reports it can realize $3.5 billion in synergies through the deal, split between $2 billion in cost savings and $1.5 billion in lower spending.

The deal would further solidify Oxy as the largest producer in the Permian, a crown that would go to Chevron if the supermajor acquired Anadarko.

Oxy will pay now 78% of deal with cash, Chevron proposes 25%

Occidental increased the cash portion of its bid to 78 percent from 50 percent on today (May 5th), The new offer of $76 per share includes $59 in cash and 0.2934 shares of Occidental stock per Anadarko share.

The revised proposal, which has been unanimously approved by the Occidental Board of Directors, represents a premium of approximately 23.3% to the $61.62 per share value of Chevron’s pending offer as of market close on May 3, 2019. The heftier buyout proposal came just hours after French energy giant Total SA agreed to buy operations in four African nations for $8.8 billion, contingent upon Occidental completing a takeover of Texas-based Anadarko.

The Total agreement augments billionaire Warren Buffett’s $10 billion commitment to Occidental, which has faced investor criticism for its unsolicited April 24 offer to best Chevron’s takeover of Anadarko.

Critically, the enhanced cash offer also lowers the amount of stock to the point that the proposed Anadarko acquisition would no longer require a vote of Oxy shareholders, potentially staving off opposition from investors that were concerned Oxy was biting off more than it could chew. 

The move confirms previous rumors, as immediately after Chevron and Anadarko’s merger was announced reports suggested Oxy had made a sweeter offer that was rejected. Oxy going forward with the deal is somewhat surprising, as the company dropped about ~6% when its interest in Anadarko was revealed, and it has continued to lag the sector since then. The chart below shows the performance of Oxy shares and the Energy Sector ETF (XLE):

Oxy offers more money, but breakup fee and shareholder vote may dissuade Anadarko

Anadarko’s shareholders now have a difficult decision to make. The company’s Chevron deal carries a $1 billion break up fee, equivalent to $2 per share. While this cost would neutralize some of the premium in Oxy’s offer, it would only cut the premium to 20% instead of 23%.

However, Chevron’s offer does not require its shareholders’ approval. Oxy will need to hold a shareholder vote before the acquisition can be completed, adding uncertainty. This uncertainty, combined with the breakup fee, could push Anadarko to stick with Chevron’s offer.

Additionally, Chevron is likely better able to digest such a large offer than Oxy is. Occidental has an enterprise value of roughly $53 billion, meaning the deal would double its size. Chevron, on the other hand, has an enterprise value of $252 billion, giving it the scale to absorb Anadarko with much less disruption.

While both Chevron and Oxy have major Permian operations and will likely be able to realize similar value from Anadarko’s position in the basin, Chevron appears to be a better fit for the rest of Anadarko’s assets. Chevron and Anadarko have complimentary GOM positions and has direct experience with the major international LNG projects Anadarko is developing in Mozambique.

Finally, I think the the stage is set for Chevron to come back with a sweetened offer. Under the terms of the companies’ April 12 merger agreement, if Anadarko formally declares the Occidental offer to be superior, Chevron then has four days to make another proposal. While it has ample financial firepower to top Occidental’s offer, it may opt instead to avoid an expensive bidding war. Taking the $1 billion break-up fee that’s part of their accord and walking away maybe an acceptable outcome for Chevron, which it could shift focus to another Permian target.

One thing is clear – Big Oil's race for acreage within the Permian and shale plays beyond is now glaringly visible and that quest is only just beginning.