Warren Buffett is picking sides in the biggest oil industry bidding war in recent memory.
The legendary investor’s Berkshire Hathaway (BRKA) plans to invest $10 billion in Occidental Petroleum to help finance the oil company’s attempted takeover of Anadarko Petroleum (APC).
The vote of confidence from Buffett adds to the tug-of-war over Anadarko, which is fielding competing bids between Occidental (OXY) and oil giant Chevron (CVX). Buffett’s investment hinges on Occidental (OXY) winning the bidding war.
“We are thrilled to have Berkshire Hathaway’s financial support of this exciting opportunity,” Occidental CEO Vicki Hollub said in a statement.
By getting a cash infusion from Buffett, Occidental could reduce the amount of money it needs to borrow from banks to pay for Anadarko. Occidental’s bid, one of the biggest oil and gas takeovers in history, has raised concerns about the amount of debt it would require.
However, Wall Street is less than thrilled at the hefty price tag being paid to get Buffett’s support. Occidental shares dropped 2% on the news.
“It’s a great deal for Berkshire. But for existing shareholders, it’s pretty expensive,” said Matthew Portillo, an analyst at investment bank Tudor Pickering & Co.
Occidental said Berkshire Hathaway would receive 100,000 shares of preferred stock that pay a sizable dividend of 8% a year. That compares with a roughly 5% dividend on Occidental’s common stock.
“While it always sounds good to have a big name like Warren Buffett in there, the buck stops with your funding costs,” said Leo Mariani, an analyst at KeyBanc.
Existing Occidental shareholders could have their positions watered down because Berkshire would receive warrants to purchase up to 80 million shares of common stock. The warrants have an exercise price of $62.50, compared with the current price of about $59.
Occidental’s share price decline on Tuesday hurts the value of its takeover offer, which is split 50/50 between cash and stock.
“It certainly doesn’t tilt the bid in Oxy’s favor. The market is not viewing this as a step in the right direction today,” said Mariani.
For each Anadarko share, Occidental offered to pay $38 in cash and 0.6094 shares of its own common stock. At current trading prices, the deal would value Anadarko at about $56 billion, including debt. Andarko said on Monday that it has entered merger negotiations with Occidental.
In a statement, Chevron reiterated that it believes its signed agreement with Anadarko “provides the best value and the most certainty” to Anadarko’s shareholders.
Chevron would be in line for a $1 billion break-up fee from Anadarko should the smaller company reach a deal with another buyer.
The proposed $10 billion investment from Buffett highlights the aggressive nature of the takeover for a company the size of Occidental. Last week, Occidental CEO Vicki Hollub promised to “rapidly deleverage” by selling off up to $15 billion of assets within two years.
Chevron, on the other hand, is one of the world’s largest oil companies and has more than twice as much cash on its balance sheet as Occidental (and Anadarko). It has the financial resources to pull off the Anadarko deal without the need to turn to Buffett for expensive financing.
Clarification: This story has been updated to better compare Chevron’s balance sheet to its competitors.