Carl Icahn Blasts Occidental CEO As ‘Arrogant,’ Preps Proxy Fight After $53 Billion Anadarko Takeover

Adding insult to injury, says Icahn, Warren Buffett took CEO Vicki Hollub “to the cleaners” with his with financing terms for an emergency infusion of $10 billion in Berkshire Hathaway cash.

In a letter Monday to the shareholders of Occidental Petroleum, billionaire activist investor Carl Icahn renewed his attack on CEO Vicki Hollub. Icahn called her “arrogant” for pushing Oxy into a bet-the-farm acquisition of Anadarko Petroleum without putting the deal to a shareholder vote and for getting played by Warren Buffett. For months Icahn, 83, who owns 4.4% of Oxy stock, has called the deal “misguided and hugely overpriced.” In his new letter he says Hollub’s bet will also “prove to be grossly negligent.” 

Hollub, in her own letter, said that Icahn’s proposal to replace four directors with his own nominees “are not in the best interests” of the company. There’s nothing really that Icahn can do now to stop the merger. Anadarko shareholders will vote on it August 8, and would be silly not to take Oxy up on its offer of $30 billion in cash and $7.7 billion in Oxy stock. Add in about $15 billion in assumed debt and the total price comes to $53 billion. For his success, Anadarko CEO Al Walker will exit with a $98 million golden parachute. 

What really bothers Icahn about this “bet-the-company” deal is that Hollub and her team “structured the Anadarko transaction in a manner that deprived the stockholders of the Company of the right to vote on the transformational Anadarko transaction,” Icahn has said in filings. He’s confident that shareholders would have voted no had they been given the chance to make their voices heard. 

The NYSE has a rule requiring a shareholder vote for any M&A deal that involves the issuance of new shares greater than 20% of the company’s pre-deal float. In the bidding war with Chevron, Oxy needed to top Chevron’s bid. They could have increased the stock component of the deal, but that would have required more than 20% dilution. The distraction of waiting for a shareholder vote would also have risked making Oxy’s deal uncompetitive. 

It’s not that Icahn thinks Oxy is paying too much—he doesn’t think the company should be buying anything at all. As Icahn has said in court filings, “Occidental’s biggest mistake, however, has to be the board’s and management’s failure to understand (or willful rejection of the fact) that at present market prices Occidental should have been a seller—not a buyer.”  

Hollub, 59, is determined to get Anadarko for its Permian Basin assets in west Texas and New Mexico, which fit directly in between Oxy’s existing hotspots for drilling and would yield billions in synergies at full-scale development. She had been pursuing the deal since 2017 and wasn’t going to let it go now. In order to get the emergency cash she needed, Hollub flew to Omaha to meet with Warren Buffett. It took them 90 minutes to hash out the terms of a deal. 

Buffett’s help didn’t come cheap. Upon approval by Anadarko shareholders, Berkshire Hathaway will give Oxy $10 billion cash in exchange for 100,000 newly created preferred shares that pay a dividend of 8% in cash or common stock. Berkshire also gets a warrant to buy 80 million Oxy shares at $62.50—a $5 billion opportunity. 

The $10 billion from Berkshire enables Hollub to boost the cash portion of the deal from 50% to 78%. And to avoid the 20% rule. Icahn thinks it’s a great financing, for Berkshire. “In my opinion, Buffett figuratively took her to the cleaners,” says Icahn in his letter today. It was “like taking candy from a baby and amazingly she even thanked him publicly for it.” 

He is especially perplexed that Hollub effectively paid Berkshire a huge upfront premium, in the form of the stock warrant—which Icahn calculates is worth $1.2 billion today. “At least one large investor that I know of would have been happy to provide the financing without the warrants,” wrote Icahn.

According to another activist investor well aquainted with the situation and the players, “The real winner here is Warren Buffett, who got a great deal in return for a smile and a cherry coke. Time will tell whether it’s a great deal for Hollub as well.”

Hollub has defended herself: “Our objective in doing this was not at all to avoid a shareholder vote. It was to ensure we had a reasonable chance to make this happen,” Hollub said on a conference call in early May. “We weren’t at all on a level playing field,” in being able to compete at the bargaining table against Chevron. In her own letter to shareholders today, Hollub reiterated her promise to deliver $3.5 billion a year in cost and operational synergies. 

To scare off Chevron, Oxy had to be willing to pay up. On top of $10 billion in debt of its own, they will assume Anadarko’s $15 billion in long-term debt and take on at least $13 billion in bank debt to fund the cash portion of the deal. Then there’s the $10 billion in Berkshire’s preferred stock (which acts more like debt). That’s a quadrupling of Oxy’s debt against only a 20% increase in share count. According to FINRA data, Chevron’s long term bonds are trading at a yield of 2.4%. Occidental’s at 3.1%. 

No wonder Icahn is worried about the health and safety of Oxy’s dividend, which he considers “one of the prime reasons” to own shares. Over the past 12 months Oxy has paid $3.12 in dividends, and this month raised the quarterly payout by a penny. Hollub has promised to not just maintain the dividend but grow it, despite nearly 20% more shares to service. And that’s in addition to the new burden of $800 million a year preferred dividend payable to Berkshire Hathaway. 

David Katz, president of Matrix Asset Advisors in White Plains, New York, another Oxy holder, says, “I welcome and applaud Icahn’s efforts.” He’s also in show-me mode when it comes to the sanctity of Oxy’s dividend, recalling that ConocoPhillips also pledged not to cut its dividend in 2015, only to be forced to do so when oil prices plunged in 2016. “On paper it makes enormous sense, but the company is 80% of their size, which runs you into trouble with leverage.”

At a recent $52.50, Oxy shares are down 25% from earlier this year, in line with most oil companies. Icahn’s position is down some $300 million in recent months, to about $1.7 billion. Hollub’s 290,000 shares are worth $15.7 million. 

Icahn’s efforts now are directed at influencing the course of post-merger Occidental. Last week, in keeping with Oxy’s byzantine bylaws, Icahn launched a solicitation asking shareholders to direct the board in writing to set a date on which it will officially accept the proposals that Icahn wants to put to a shareholder vote. Just getting the board to agree to set this date will require written requests submitted by at least 20% of shareholders. If he gets past that obstacle, Icahn can then move to solicit shareholders for their proxy — or permission for his team to vote their shares as part of a unified block. His goal is to replace board members, sell non-cash-flowing assets and protect the company from management hubris. 

Is there a chance Icahn can break Oxy’s board open? If so he’ll need help from smaller investors just to get the initial 20%. But the support appears to be there. John Linehan, portfolio manager at T. Rowe Price, was irritated enough by the deal to vote 21 million shares against management at the recent annual meeting. “We really struggle to understand the logic of not putting a transformational deal to your shareholder base,” Linehan told Reuters in May.

Christian Ledoux, chief investment officer at South Texas Money Management ($3.7 billion assets), has about $50 million invested in Occidental. He says he’s on Icahn’s side, “100 percent.” Ledoux agrees that the Permian needs consolidation, and Oxy will certainly bring scale and consistency, but what he doesn’t like is Oxy preselling assets (Total has agreed to buy Anadarko’s stake in Mozambique LNG for $8.8 billion) at what can only be fire-sale pricing. 

Icahn’s solicitation was matched Friday with a filing from Oxy management encouraging shareholders to not just ignore Icahn, but also to send in a proxy revocation form, just to make it clear that they hadn’t given their vote to Icahn or anyone else. Hollub, in her own letter Monday, told shareholders that Icahn’s “own statements demonstrate that he does not understand or support the strategic and financial merits of the acquisition and we believe that his Board nominees would interfere with our ability to successfully integrate Anadarko’s valuable assets, execute our divestiture and deleveraging plan and deliver on the full promise of this acquisition at this critical juncture.” 

Hollub’s best intentions will be held hostage to commodity prices and global economics, investors say. If money stays cheap and oil demand booms, then Hollub is the hero. If the economy stalls out and demand for oil flags (or even peaks), they’re toast. And then, perhaps, Chevron will get another bite at the apple. 

Check out my 2017 Forbes Magazine profile of Hollub:

Forbes Christopher Helman