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Holly LaFon
Holly LaFon
Articles (10163)  | Author's Website |

Warren Buffett Commits $10 Billion to Occidental Acquisition of Anadarko

Similar to Goldman Sachs deal, Buffett would get warrants and sizable dividend

Warren Buffett (Trades, Portfolio) has found a place to apply $10 billion of his $112 billion in spare cash.

The Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) chairman and CEO will invest $10 billion in Occidental Petroleum Corp. (NYSE:OXY), contingent on the company completing its acquisition of Anadarko Petroleum Corp. (NYSE:APC). Houston-based Occidental, one of the largest oil and gas exploration companies in the U.S., has made three bids for Anadarko since March. Its latest offer, including Berkshire funding, may wrest Anadarko from an acquisition agreement it previously made with Chevron (NYSE:CVX).

Occidental increased its offer for Anadarko to $76.00 per share, or $38 billion, split 50-50 between cash and stock, on April 24. Previously, on April 11, it had made a $76-per-share bid split 40-60 between cash and stock, but Anadarko accepted an earlier offer from Chevron for $65 per share, or $33 billion, the following day. Anadarko then decided on April 29 to engage with Occidental due to its updated offer.

In the deal, Buffett would receive 100,000 shares of cumulative perpetual preferred stock, with a liquidation value of $100,000 per share and 8% annual dividend. He can redeem the shares for cash at the option of Occidental in at least 10 years for 105% of the liquidation price, in addition to dividends. He would also receive warrants to purchase up to 80 million shares of common stock with an exercise price of $62.50 per share. The expiration date for the warrants is up to one year after Berkshire redeems the preferred stock.

“We have long believed that Occidental is uniquely positioned to generate compelling value from Anadarko’s highly complementary asset portfolio. We are thrilled to have Berkshire Hathaway’s financial support of this exciting opportunity,” Occidental CEO and President Vicki Hollub said in a statement. “We look forward to engaging with Anadarko’s board of directors to deliver this superior transaction to our respective shareholders.”

The deal represents an unusual tack for Buffett, who typically prefers ostensibly friendly deals. Occidental’s hostile takeover offer puts it up against Chevron, a much bigger player Anadarko preferred. Chevron has $8.69 billion in cash on its balance sheet, versus $3.03 billion on Occidental’s. It has a $228.7 billion market cap, several times larger than Occidental’s $44.04 billion.

Combined, Occidental and Anadarko would generate more than 1.4 million barrels of oil per day. Other benefits include expanding Occidental's international and chemicals portfolio, and boosting its cash flow and dividends.

Moody’s placed Occidental on review for a downgrade after its increased bid, however. The ratings agency said the deal would “afford strategy and cost benefits” but add heavy debt.

"OXY's proposed acquisition of Anadarko, if successful, would be a significantly leveraging transaction, adding almost $40 billion of debt to OXY's capital structure," Moody’s Vice President Andrew Brooks said in a statement.

"The proposed acquisition would further strengthen and diversify OXY's upstream and midstream asset base, adding further scale to its already large acreage position in the Permian Basin. However, OXY would be challenged to deliver asset sales, capital and operating cost synergies and superior execution on the acquired assets to fund debt reduction should its bid for Anadarko prove successful,” he said.

Buffett also has relatively limited investment in oil and gas stocks. Energy encompasses just 0.72% of his common stock portfolio, the second-smallest sector represented.

Last week, he lamented a lack of companies that Berkshire could profitably invest in, telling the Financial Times he would even consider a $100 billion repurchase of its shares.

Read more here:

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About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


Rating: 5.0/5 (3 votes)

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Comments

stephenbaker
Stephenbaker - 8 months ago    Report SPAM

Buffett's dilema is that no single investment will move the needle any longer. With $100+ billion in idle cash and growing every day, what are his choices? Even if this deal goes through, it is a $10 billion investment and by the time it closes, the cash hoard will be more than it is now. How many private companies are for sale for $50 billion or more? In the public equities market, in order to invest $100 billion, he's limited to giant market cap companies and even then, buying up to 10% of the entire market cap would still leave plenty of uninvested spare cash in the company coffers. Berkshire needs a major market disruption or economic collapse in order to be able to successfully invest meaningful amounts of cash. As a shareholder, and as much as it hurts, it looks like it is time for the company to start paying a dividend.

jpmacres
Jpmacres - 8 months ago    Report SPAM

Thanks for the article. This is by far the most detailed description I was able to find.

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