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Oxy Owes Buffett, and Now Icahn Wants His Due

Oxy Owes Buffett, and Now Icahn Wants His Due

(Bloomberg Opinion) -- Vicki Hollub, CEO of Occidental Petroleum Corp., has tangled with one venerable gentleman already this year. The genial Warren Buffett is providing $10 billion of funding for her hard-won acquisition of Anadarko Petroleum Corp., beating out Chevron Corp. Now another, somewhat less genial octogenarian has shown up in the form of Carl Icahn. He has launched a lawsuit against Oxy lambasting that acquisition, not least because of Buffett’s role in it. In typically diplomatic style, Icahn characterizes Hollub’s trip to Nebraska thus:

… a ninety-minute deal “negotiation” with one of history’s canniest investors is no place to gain M&A experience—at least if you care about protecting your stockholders.

One suspects Icahn might describe himself in similarly historical terms if pressed. Still, as his complaint acknowledges, it is unlikely he can stop the Anadarko deal going through and Buffett getting his preferred stock and warrants in Oxy. While Anadarko’s discount to the implied offer widened further on Thursday, it remains less than 5%.

Oxy Owes Buffett, and Now Icahn Wants His Due

That doesn’t mean Hollub is in the clear, however.

Icahn lobs several rhetorical hand grenades in the filing, but the ones about the financing from Berkshire Hathaway Inc. are the most damaging because they are on the mark. Buffett extracted a very high price for his backing. As an experienced corporate payday lender, this is – to paraphrase a slogan from another of his businesses – just what he does. Worse, Oxy agreed to pay Buffett 8%-plus so as to avoid its own shareholders – getting a dividend yield of just 5% at the time – having a say via a vote . Icahn’s indignation may be of a type that is well-practiced in its righteousness, but he also has a point:

There are many disturbing aspects of the Anadarko deal, but the Icahn Parties believe that this is probably the single most disturbing of them: By failing to obtain a stockholder vote to approve this bet-the-company gamble, OXY’s directors usurped the fundamental and critical role of the stockholders.

With the board having just been re-elected at an annual shareholder meeting that was effectively a proxy referendum on the deal – albeit with relatively low majorities – Icahn successfully convening a special meeting to elect fresh faces and stymie the deal looks improbable. Then again, so did Oxy’s chances of claiming Anadarko.

Either way, the very fact this veteran agitator is now seeking documents connected with the deal presents a problem. Because it’s clear from what’s happened to Oxy’s stock that, in the peculiar court that convenes most weekdays on Wall Street, Hollub is in the dock already.

Management’s defense, as laid out in this month’s earnings call, is that it wanted a shareholder vote but Anadarko’s reluctance to recommend a deal with a vote attached meant either raising the overall bid even more or, as was chosen, juicing the cash portion at the expense of that vote. That is true in purely mechanical terms, but the logic only convinces if the deal is regarded as a must-have –and that does not appear to be a widely held view.

Having sold off, the stock is now very close to its January 2016 low point, when oil traded below $30 a barrel. Since April 11, Oxy has underperformed the energy sector by almost 12 percentage points, a relative loss of $5.9 billion despite the company “winning” a bid battle supposedly resulting in billions of annual synergies. Besides the inherent snub of the Buffett arrangement, Oxy’s profile has taken a 180-degree turn from low-leverage dividend payer to high-leverage risk taker. The dividend provides a backstop at the current yield of 6% and looks safe unless oil dips into the $40s again. But there is no denying that, at least for a couple of years, Oxy will rely on the oil gods to give it breathing space to pay off debt, deliver synergies and prove it was all worth it.

Investors feel nonplussed with oil companies and their highly paid executives as it is (see this). If Oxy stumbles – or, say, multiple trade wars put oil in an extended funk – there will be little goodwill to fall back on. At that point, it is entirely possible Chevron or another oil major might be tempted to swoop in and make a play for a combined Oxydarko, assuming they could stomach the debt and preferreds. In that way, Icahn might ultimately be granted his wish.

Regardless, the one certainty in all this is that the other old gentleman will profit quite handsomely.

By raising the cash portion of the bid for Anadarko, Oxy took the stock portion below the threshold of 20% of its current shares outstanding that would have necessitated a shareholder vote.

To contact the editor responsible for this story: Mark Gongloff at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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