Last week someone commented to me that Chevron could now buy Occidental Petroleum cheaper than it offered to acquire Anadarko.
There is an element of truth to the statement, but it is complicated by Occidental’s debt. So let’s review the numbers.
Eleven months ago, Chevron attempted to buy Anadarko in the sixth-largest oil and gas deal in history. The deal would have given Anadarko $33 billion, and it would have assumed Anadarko’s $17 billion debt for a total cost to Chevron of $50 billion.
Occidental then entered the bidding, ultimately offering to pay 78% in cash and 22% in stock in a transaction valued at $57 billion. In my opinion, this price would have destroyed the cost synergies Chevron had targeted with their original offer, so I wrote an article urging Chevron to walk away from the deal. The ultimately did, collecting a $1 billion breakup fee from Anadarko in the process.
The offer from Occidental was accepted, and Occidental’s share price has been in free fall ever since.
Prior to making the offer last May, Occidental had a market capitalization of just under $50 billion. Today, Occidental has a market capitalization of under $13 billion. Thus, at least in theory Chevron could start buying Occidental shares on the open market and potentially acquire a majority of the combined company — Occidental plus Anadarko — for a fraction of what they were willing to pay for just Anadarko.
However, it’s a little more complicated than that. For example, Chevron would have to announce their intention, and that would potentially drive Occidental’s share price higher.
So perhaps they could just make Occidental an offer. If Occidental’s current market capitalization is $13 billion, maybe it would make sense to offer them $50 billion — the original offer to acquire just Anadarko.
But if Chevron were to simply make an offer to acquire Occidental, the debt would be a potential issue. We can see this by comparing the enterprise value of Occidental a year ago to its value today. The enterprise value calculation includes the market capitalization plus the current debt, which an acquiring company would need to assume.
A year ago, Occidental’s enterprise value was $54 billion. Today, its enterprise value is $80 billion. That is a result of the massive increase in debt Occidental took on as a result of the acquisition.
Part of that debt was issuance of $10 billion of preferred stock to Warren Buffett, which earns his company an 8% dividend. Last week Occidental announced a steep dividend cut to preserve cash in the wake of the collapse in oil prices, but Buffett still gets his 8%.
Thus, on the surface it might appear that Chevron (or any other major oil and gas company) could nab Occidental for a fraction of its market value a year ago. In reality Occidental’s liabilities of nearly $80 billion (versus $22.5 billion a year earlier) would probably be a major obstacle in getting a deal done.