What This Hostile Takeover Means for Investors

The following video is part of our "Motley Fool Conversations" series, in which energy editor and analyst Joel South and manufacturing editor and analyst Isaac Pino discuss topics around the investing world.

In this edition, Joel discusses the newest hostile takeover bid by legendary corporate raider Carl Icahn. The billionaire boardroom brawler has his eyes on CVR Energy and has acquired a majority of CVR's shares, giving him the controlling interest and the proxy vote. Icahn has made his intentions clear, stating that he will sell the company, but the question is whether he'd sell it intact or split the energy and chemicals divisions and split into two separate sales. Check out the video to see who may be interested in the CVR and what a sale means for its shareholders.  

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Isaac Pino and Joel South have no positions in the stocks mentioned above. The Motley Fool owns shares of Yahoo!. Motley Fool newsletter services recommend HollyFrontier and Yahoo! Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On May 11, 2012, at 1:07 PM, steinwaycapital wrote:

    The ho-hum and a bottle of rum analysis would be suggesting a fast and furious sale process.

    This truly depends on willing buyers paying top dollar for the properties (meaning 35 dollars after all relevant fees).

    I wonder if there are many strategic buyers out there willing to shell out $3 billion for refinery linked assets.

    This is not to say that the assets may not be worth this price tag under certain scenarios.

    He would have to be really motivated to see a sale brought to conclusion.

    The less rosy view on this entire sale and contingent value right process could be that the sale push is much less aggressive than presumed. Mr Icahn gets to enjoy strong cash flow for 3-4 years running and after recouping

    lots of his cost basis, and proving his investment thesis. Then he will sell the company at 3, 4 times his then adjusted cost basis.

    in the case of National Energy Group it took 3 years till he flipped the assets at reportedly a 10fold gain. (I think it was actually more 5 fold but the press has picked it up as 10 fold).

    the assets of NEG which was renamed Rialta were sold to SanRidge, which was lead by Tom Ward, co-founder of Chesapeake. Icahn is also a big investor in Chesapeake through converts and common.

    Maybe, Icahn is going to flip this after some years to his buddies at Chesapeake. In a stock for stock deal and when nat gas prices hit rock bottom, right before the big recovery. I am sure Chesapeake could make use of their storage facilities and potential to add more storage, pipelines and limited refining fert assets. The timing of such transaction though is highly speculative. It would though be a very good currency if he used it to double down on his bet on Chesapeake. Provided there is a willingness to take up the CVR assets. A shared geography is the lowest common denominator. Now all you need is agreement to get it done.

    Admittedly, there would be much more money in for Mr Icahn if he sold the entity 2 years after closing the deal.

    I don't think he is in this game for flipping the property for cash, unless he gets a really sweet deal. Much more likely is a doubling down on a bet involving stock in a target company. Chesapeake is the only fit that came to my mind glimpsing at past and current rolodex of all key people here, those being Mr. Icahn and Bob Alexander. The other guys dont have much of an oil experience to begin with.

    I see quite some synergies in such a future tie-up.

    As natural gas prices increase in future, if they do, the ownership of fertilizer assets based on petcoke gasification process is definitely a diversification. Clearly a hedge for a biz like Chesapeake which is so nat gas dependent. On the other hand the petroleum products generated by Chesapeake could be value added at the CVR refineries.. it would be what I call a win-win situation..

    of course all these are just speculations. This doesnt put any firm price tag on the CVRs.

    Given the amount of research that Icahn has put into this, I would generally opt at this point for a no-tender view to ride out the volatility and stomach the risk but ultimately be in the same boat as he is. If CVI gets sold anyway within 15 months you get the same consideration. If it is not sold but sold at later point you still participate, plus you participate in all dividends till we get there.

    This would be an implementation of contrarian M&A involving the tie up of capital. But for this to happen you have to believe that there is an underlying business case that is based on more than just flipping assets.

    The technology that CVI holds was licensed from Texaco and Texaco passed it onto General Electric. General Electric's thermal business unit is quite busy farming out coal gasification technologies these days. In fact they just signed a major JV in China on a technology that creates Syngas out of Coal. This is not identical to the petcoke to syngas to fertilzer process that CVI uses but it is being brought to market by the same guys holding the CVI intellectual property.

    CVI is the only company in North America using the petcoke to fertilizer process. And since 2010, CVI has been increasing UAN capacity by more than 50% based on this arcane petcoke gasification technology. Under the right circumstances there could be more of these petcoke implementations. CVI is familiar with the process and its facility might be continued to be flooded by abundant petcoke for years to come.

    If the petcoke comes from a strategic partner such as Chesapeake, the margin would stay inhouse. That is though visionary thinking and not very deal relevant in the next 7 to 30 days.

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