Oxy's Sweetener a Bitter Pill for Warren Buffett

By Jinjoo Lee

Warren Buffett's $10 billion preferred-share deal with Occidental Petroleum last year was like "taking candy from a baby," fumed shareholder Carl Icahn. That figurative baby -- whose new board now includes Mr. Icahn's deputies -- has found a way to snatch some of that candy back.

The company announced in late June that it plans to hand out warrants: Specifically, it offered shareholders of record as of July 6 the ability to buy an eighth of a share for each one they own at $22 for the next seven years. The warrants can be sold for cash starting next month.

They serve a couple of functions. One is a consolation prize for existing shareholders now getting a symbolic dividend of just a penny a share. Some are suing Occidental for its ill-fated decision to buy Anadarko Petroleum. In addition to all the debt it had to take on for the purchase -- Occidental has some $40 billion of it -- the pandemic-induced oil market disruption has crushed its share price. The warrants also would eventually bring in over $2 billion in cash if exercised.

Mr. Icahn's fingerprints are on the move to issue the warrants. In a statement relating to their issuance, he said he is pleased that the new chairman, along with his "three director representatives," have helped create "a more stockholder friendly board."

But the warrants are also a quiet snub to Mr. Buffett, whose Berkshire Hathaway helped fund Occidental's gigantic acquisition with preferred shares not eligible to receive warrants. Occidental needed the $10 billion in cash to prevail over Chevron while avoiding a shareholder vote on -- ironically -- issuing new shares.

Mr. Buffett won't miss out entirely. Berkshire owned roughly 2% of Occidental's common shares as of March 31, according to FactSet, and then got another 2% when his quarterly preferred-share dividend was paid out in common stock on April 15. Yet it hardly seems coincidental that the stock began trading without rights to the warrants seven business days before Berkshire is due to get its dividend, which Occidental has again opted to pay in shares rather than cash.

That form of payment is supposed to come with its own sweetener -- a 10% discount -- with a price determined by Occidental's volume-weighted average price the 10 business days after the preferred dividend is declared. They partially overlapped with the days after the warrant was announced. The upshot is that Occidental's warrant-free share price then dropped more than it might have otherwise. As of Thursday, Mr. Buffett was getting shares worth about $188 million instead of $200 million in cash.

The snub doesn't end there. Berkshire also received 80 million warrants in last year's deal, giving it the right to buy Occidental shares for $62.50 each after the preferred shares are redeemed. New share issuance indirectly lowers Berkshire's possible future payoff. With the strike price of the new warrants so much lower, their market price should be attractive. Shorter-dated $22 calls expiring in January 2022 fetch over $3.00. Mr. Icahn owns almost 10% of Occidental's shares.

At least there is a silver lining for Mr. Buffett. The collapse in energy prices made the 8% coupon on his preferred shares, which rank above equity but below debt in the pecking order in the event of bankruptcy, riskier. While issuing equity isn't ideal, the cash makes Berkshire's quasi-debt security safer.

But there are many ways to sell stock. Doing it this way, Mr. Icahn can claim a small victory over his fellow billionaire investor.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

July 10, 2020 07:14 ET (11:14 GMT)

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