The Bidding War for Anadarko Has Been Going on Longer Than We Knew

When energy giant Chevron (CVX 1.20%) revealed on April 12 that it was bidding $33 billion for oil and gas driller Anadarko Petroleum (APC), it sounded like a done deal -- at a nice premium for the shareholders, too. But last week, Occidental Petroleum (OXY 0.56%) publicly outbid Chevron, to the tune of $38 billion. It also revealed that it had privately been offering more than $33 billion even before Chevron's offer hit the news.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann put the whole situation in context.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 25, 2019.

Chris Hill: Let's move onto the oil industry. A little bit of background here. It was two weeks ago that Chevron made a bid for Anadarko Petroleum. I think the initial bid was somewhere in the neighborhood of $33 billion.

Bill Mann: That's right.

Hill: I think either same day or within 24 hours, Occidental Petroleum came out with a competing bid. By competing bid, I mean a higher bid. We'll get to the numbers in a second. You and I were going back and forth on Slack yesterday. You said to me, "Can we please talk about this?"

Mann: Yes! It's the first big hostile takeover bid that I can remember in quite some time. There are a couple of really interesting things about this.

Hill: Let me interrupt.

Mann: I'll hold the interesting.

Hill: No, no, I was just going to say, I neglected to mention that when that news first broke, that Chevron has made this bid for Anadarko Petroleum, all of the coverage had this tone of, "Well, this all seems neat and tidy. It's just a matter of dotting the I's and crossing the T's." And the Occidental bid appeared to have come out of nowhere.

Mann: What Occidental has said over the last 48 hours was that they had been making bids to Anadarko prior to the April 12th announcement from Chevron. They were ignored. If this is true -- and I have no reason to assume it wouldn't be true -- Occidental was trying to get onto their dance card for a long time before this. Occidental did what we market watchers love to see. They went public with a much higher bid, $38 billion vs. the $33 billion. Anadarko is evaluating whether $38 billion is better than $33 billion. I mean, I have a math answer for this. [laughs]

Hill: [laughs] The shareholders may have an answer.

Mann: Yeah. It depends on whether it's cash and stock. But there is precedent of a company accepting a lower dollar amount bid because they think it's going to be a better fit. Another really interesting thing that happened with Anadarko is that just the day before the announcement came out that Chevron wanted to buy it, the CEO and the CFO had the terms of their contracts changed so they'd get a much higher payment for severance in the case of a merger. Al Baker will potentially receive $66 million, should the Chevron bid go through.

Hill: Let's get back to the numbers for a second here.

Mann: Oh, I said Al Baker, Al Walker is actually the name. I apologize Al Baker. I'm sorry, one, to not say nice things about you; and two, you're not getting $66 billion no matter what.

Hill: I love to think that somewhere, there's a listener named Al Baker whose eyes just lit up like, "Wait, I'm getting what?!"

So, Chevron has a market cap of around $225 billion. It is dramatically larger than Occidental Petroleum. If you just look at the market caps, it's like, wait a minute, doesn't Chevron have much, much deeper pockets than Occidental Petroleum, and therefore isn't that where this is going? I mean, I get that if you're Anadarko, you're like, "Look, Chevron, we know how big you are. I know we had a deal at $33 billion, but now the price has gone up a little bit." If Chevron wants this, they can make this happen, right?

Mann: Yes. Chevron's saying they're unlikely to raise their bid, which is probably what they should say. [laughs] But in the meantime, Anadarko is probably doing the smart thing, like, "Well, we're figuring out whether 38 is more than 33." [laughs] They've got their abacus out.

Hill: Occidental Petroleum, their market cap is about $47 billion. Where are they coming up with $38 billion?!

Mann: There are these crazy things in America, Chris, called banks. They're going to lever up to take on Anadarko.

Hill: And nothing bad will happen.

Mann: No, no! The spreadsheets say that everything will be just fine. But these are mergers that absolutely should happen. There should be consolidation in this industry. Anadarko has some really, really attractive assets for whoever ends up winning.

Hill: I totally get why shareholders of both Chevron and Occidental would be excited for this to go through. These are stocks that have been treading water for a while.

Mann: Yeah, nobody's paid attention to them for quite some time. Being a really, really heavily capital-intensive, natural resource E&P company, it just hasn't been that exciting for investors for quite some time. Welcome to your days in the sun.

Hill: It's going to be a fun drama to watch play out.