M&A is tough. Mega deals are even tougher. Sometimes they are so hard they end up being disastrous. That’s turning out to be the case for Occidental Petroleum’s $55bn takeover of Anadarko.
On Tuesday, Oxy, as the company is known, said it would slash its dividend by almost 90 per cent, the first payout cut since 1991, in a dramatic move aimed at saving the explorer as it seeks to manage the sharp collapse in oil prices following the Saudi-Russia price war.
That’s a massive contrast to the euphoria of nearly a year ago.
In May 2019, with the backing of billionaire investor Warren Buffett, the Houston-based company successfully managed to fend off its larger rival Chevron in one of the most memorable takeover battles in recent years.
It was a huge victory for Oxy’s chief executive Vicki Hollub. Not only did she gatecrash Chevron’s deal, she got the deal done against the wishes of one of the company’s largest individual shareholders, the activist investor Carl Icahn.
The promise then, in the company’s own words, was “to realise the full potential of the transaction while maintaining a strong balance sheet, investment grade credit rating and its current dividend”.
That promise has now been solemnly shattered.
Investors welcomed Tuesday’s move, as Oxy’s stock moved up more than 14 per cent to about $14 a share. But that doesn’t cancel the fact that the overall equity value of Oxy has been gravely hit since the deal with Anadarko was announced in May. Before Oxy publicly approached Anadarko its shares were trading at close to $70 a share.
What’s even more dire is the state of the company’s bonds, which plummeted on Monday. A $750m bond maturing in 2049 fell from 88 cents on the dollar to just 64 cents, before staging a muted recovery on Tuesday, rising to 72 cents on the dollar.
The change in dividend payout, from $0.79 to $0.11, means the annual payment will shrink from $2.8bn to $400m. Who won’t be affected by all this is Buffett.
The 89-year-old investor from Omaha was given preferred shares last year in exchange for $10bn to help Occidental finance the takeover of Anadarko. As part of the financing deal, Buffett was guaranteed that his shares would receive an 8 per cent dividend, and a warrant to buy up to 80m shares of common stock, about 11 per cent of its equity. That means that Buffett will continue to get annual preferred dividends of $800m.
Hollub’s plan has been designed for a world where the price of oil goes as low as $30 a barrel. It’s not clear what could happen if the situation gets any worse.
Does Chevron come back to buy parts of Oxy? DD’s sources say that is highly unlikely now.
To get more on this read the news in the FT here, smart analysis from Lex here and a good Bloomberg opinion on the deal here.
Private equity: supersize me
While we’re on the subject of megadeals, let’s take a look at private equity.
After the 2008 crisis, European private equity lost its appetite for them for a long time (and the US was a bit more cautious, too). Take a look at the chart below: the biggest deals in Europe are clustered in the run-up to the crisis or in the past couple of years.
Now, the industry is hungry again. The clearest sign is a €17.2bn deal to buy Thyssenkrupp’s lifts business last month, led by Advent and Cinven. (Side note: dealmakers realised in the final stages of the sale process that the company was still servicing lifts in downtown Wuhan with the city in lockdown over coronavirus. If that’s not resilient revenue, they figured, what is?)
Big deals have worked out better since the crisis than before it, the chart on the left below shows. But the biggest deals haven’t always equated to the best returns. In the past decade, deals for companies valued at more than $10bn have returned $1.81 to investors for every dollar they put in, compared to $1.92 for targets below $5bn, according to figures from Cepres.
Megadeals have a mixed history. In 2007 a consortium including TPG and KKR bought the Texas power company TXU in a $45bn deal — but it filed for bankruptcy in 2014. On the other hand, Blackstone’s $26bn purchase of hotel chain Hilton Worldwide in 2007, after a rocky path, ended up being one of its most profitable deals.
This time round, it’s hard to see the appetite for big deals falling even after a crisis. Buyout groups have raised record-sized funds and have to put them to use. As Bain & Company’s Brenda Rainey puts it: “A small deal, even if it goes really well, is just not going to move the needle.”
Market volatility is good news for some hedge funds
It’s still too early to tell how long the wild market swings of the past few weeks will last. But it is already shaking up the investment industry, leaving those that bet on bonds or volatility with some big wins.
Among the winners are Roy Niederhoffer’s New York-based computer-driven hedge fund, which tries to calculate when markets have become too fearful or too greedy.
RG Niederhoffer Capital Management’s flagship diversified fund — one of the world’s oldest quant hedge funds — has gained 37 per cent this year, after losing 28 per cent in 2019 when markets rose.
“This is a sad situation that has created the ultimate in conditions for our strategy,” Niederhoffer told the FT. “This is the kind of volatility we haven’t seen since the [global financial crisis].”
Go deeper with this just published piece by the FT’s Laurence Fletcher, Ortenca Aliaj and Robin Wigglesworth.
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