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Bram de Haas
Bram de Haas
Articles (393)  | Author's Website |

Buffett Inks Another Great Deal

Berkshire's investment in Occidental is contingent upon the acquisition of Anadarko

April 30, 2019 | About:

Occidental Petroleum Corp. (NYSE:OXY) announced on Tuesday it made a deal with Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) to help with the financing of its potential acquisition of Anadarko Petroleum Corp. (NYSE:APC).

The company is in a bidding war with Chevron (NYSE:CVX). Its latest offer is valued at $57 billion, which is a stretch for Occidental, whose current market cap is below $50 billion. Financing is a pain point for the board of Anadarko, and that’s likely why Occidental turned to the Oracle of Omaha.

Warren Buffett (Trades, Portfolio)'s Berkshire is not the place to get cheap money. It is the place to go when banks won’t lend it to you, but you need a lot of money and you need it quickly. Unsurprisingly, Occidental sold-off and, surprisingly, so did Anadarko.

The deal is contingent on Occidental securing the deal with Anadarko (there’s no need for it if Chevron wins). If it goes through, Berkshire Hathaway will get 100,000 shares of preferred stock with a liquidation value of $100,000 per share and a warrant to buy 80 million shares of Occidental common stock at $62.50 per share. The preferred stock will accrue dividends at 8% per annum (or with respect to dividends that are accrued and unpaid, 9%).

For its $10 billion investment, Berkshire gets its face value in preferred stock with a very high coupon of 8%. This pretty much assures Occidental will want to take it out down the road. It can do so in 10 years at a redemption price of 105% of par. The company can pay both the coupon and settlement in shares. The warrants last until one year after the preferred shares get taken out, which is another reason to do so. The warrant makes this a very expensive deal. A Black-Scholes calculation puts the value of the warrant at $1.36 billion. A positive view on Occidental - which Buffett may have - increases that value further.

This deal more or less indicates Berkshire thinks there is a lot of value in Occidental and Anadarko's assets. Buffett wouldn’t want to be in a preferred stock position which is down in the capital structure. Berkshire is getting a nice coupon through the preferred stock with a huge bonus in the form of warrants. Shareholders are probably right to sell the stock.

Regardless, Berkshire shareholders should rejoice as this is a great deal. The deal, however, decreases the chances of Occidental's shareholders approving it. It will be prime fodder for an activist coming in and demanding the company shut it down, but existing shareholders have likely raised concerns about financing. In that sense, the damage from giving up so much value to Berkshire is somewhat mitigated.

Why I think this is counterintuitively bullish news for Anadarko investors (myself included) is because it helps put pressure on Chevron and gives Occidental some financial legroom to further sweeten its bid to sway Anadarko's board. The value is in Berkshire and Anadarko. While $10 billion doesn’t really move the needle for Berkshire, my money is on the latter.

Disclosure: Author is long APC.

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Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

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