Playing the field: Competing bids for

Anadarko Petroleum
Case 2, Mergers & Acquisitions, Term 2 2022

Instructor: Prof. José-Miguel Gaspar

Group 7: Himanshu Bohra, Federico Garone, Niccolò Mori, Utkarsh Sharma, Johannes Zobel

Cergy | 17 Feb 2022

Table of contents

1. Executive summary
2. Anadarko: Rejection of offers
3. Occidental: Revision of offers
4. Financial analysis
3.1 Worth of OXY’s offer to APC shareholders
3.2 DCF Analysis
3.3 Synergies valuation
3.4 Valuation summary
5. Berkshire Hathaway’s funding package
6. Recommendations
7. Appendix

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 Executive summary

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 Anadarko: Rejection of OXY offers
Merger proposal timeline Why did Anadarko reject offers from OXY?

March 20, 2019 Anadarko Petroleum Corporation rejected 2 offers worth $76 per share from
CVX offered
$65.00 per share Occidental Petroleum Corporation in favour of $65 per share offer from Chevron
140 (25% cash & because:
75% CVX
shares)
• Occidental Petroleum Corporation (OXY) put in 2 revised bids of 76$ per
120
share for Anadarko Petroleum Corporation, which were offering higher share
price as compared to the 65$ per share price offered by Chevron.
January 19, April 11, 2019
100 2018 March 23, 2019 CVX offered
OXY offered OXY offered $65.00 per • Although these 2 offers were superior offers to Chevron offer, Anadarko’ CEO
$76.00 per $76.00 per share share ($16.25
share (not more ($19 cash + cash + 0.3869
AI Walker feared that if the deal were to go through, an OXY shareholder
May 26, 2017
80 OXY offered than 50% cash) 0.8737 OXY CV shares) vote was required in stock-deal transaction as defined by a precise NYSE
$61.22 per shares) rule.
share (100%
OXY Shares)
60
• Several of the OXY’s largest shareholders voiced their concerns as
“Occidental’s Management has characterized this deal as a ‘transformational
deal’ and we feel that any such deal should be put to a shareholder vote’.
40
• Another concern for APC CEO AI Walker was that the 2 offers had a
significant contribution of OXY shares as compared to cash. The declining
20 share price of OXY meant reduced value for the APC shareholders.

Therefore, feared whether the deal would go through amidst the divided OXY
0 shareholder board and the declining stock price of OY shares, APC CEO AI
7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9
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M
a Ju J u A u S e Oc No De J a Fe Ma A p Ma J u J u Au Se Oc N o D e J a F e M a Ap M a J u Ju Au

Anadarko share price OXY Share price Chevron share price

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 Occidental: Revision of offers
The revised merger proposal from April 24 to May 5 submitted by Hollub offered
significantly higher closing certainty
How do the two offers differ? Why was the offer revised?

DATE OFFER CASH OCCIDENTAL’S OCCIDENTAL’S The offer was revised in order to provide a significantly better
OF OFFER PER SHARE PER SHARE SHARES PER SHARE SHARE PRICE
deal over the one offered by Chevron since there already
existed a $1 Bn breakup fee and the merger offered huge value
April 24 $76 $38 0.6094 OXY shares 62.00
through annual pre-tax savings (Operating efficiencies,
May 5 $76 $59 0.2934 OXY shares 57.33
integration of global supply chain functions, and reduction in
general and administrative expenses).
Profitability
The new offer provided significantly higher cash per share from
both the previous offer as well as the one made by Chevron,
thereby giving a higher closing certainty due to reduced
Total  The total deal consideration for both proposals was the same at $76 per uncertainties over share price fluctuations.
consideration share (with share offering at a price as of that day), however, the structure
of the consideration was different.
Ms. Hollub & Mr. Buffett structured the new offer in such a
manner that an Occidental shareholder vote would not be
required, implying zero risk of management bringing the to finish
Cash  The revised May 5 proposal offers roughly 1.5 times cash per share
line once it was accepted.
component acquired than the April 24 offer, implying a 78% payment in cash
compared to 50% earlier.
It will generate immediate value for Anadarko’s shareholders
since the acquisition financing by Berkshire Hathaway was
Share more balance sheet friendly.
 Occidental’s share offering per share of Anadarko reduced to nearly half
offering of what it offered before, thereby reducing the risk of future share price
movements from deal value.
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 Worth of the OXY May-05 offer to APC shareholders
APC share holders gain up to US$ 7.38 in value per share, compared to the current
market value, depending on the realization of synergies post-transaction
Pro-forma NewCo – EV to Equity bridge (USD MM)

Worth of the offer per share versus share price May-03 2019 (USD) Stockholder gain - sensitivity to synergy realization
PV (Synergies) Stockholder gain / share
USD MM USD
$ - $ 4.13
$ 5,000 $ 5.75
$ 10,000 $ 7.38

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APC Standalone Case (SAC) - DCF Analysis

APC WACC Derivation Implied EV (USD millions)

USD millions              
Cost of capital   APC   Comments      
               
10-yr US Treasury yield on May 3,
Risk-free rate 2,54% 2019
   
               
Cost of debt   4,0%    

               
Cost of Equity:        

Beta   1,58   Equity Beta (5-yr estimate)    

Market risk premium   6%          
               
               
Cost of Equity   11,99%          
               

Gross Debt   16.417,0          

Market Value of Equity   22.108,5          

               
               
D/E   74,3%           Terminal Value Calculation Using a Simple Perpetuity Terminal Value
     
D/(D+E)   42,6%          
  Supra normal growth period     Perpetual growth    
               
         Period begins 2029    
Weighted Average Cost of Capital:                Period ends -   
Tax rate   25,0%              WACC 8,2%    
         Growth rate (b) 0,9%    
               
         FCF @ 2029 4.555,5    
WACC   8,16%          
TV of perpetual growth period @
      
2028 62.793,1
                     
                
Unlevered cost of equity capital:              
  PV of Terminal value 30.000,4           
                           
     
RU Obtained by applying MM
9,13% Proposition II   b) Lower bound of 0% as oil and gas assets get depleted over time and there is only a finite amount in the ground
     
  Thus, 0% < Long-term growth rate <2019 US Inflation rate (1,81%) Source: WorldBank    
               
Synergies Valuation

Model Assumptions

NPV Synergies Mid-Point

Valuation Summary

DCF SAC Sensitivity Analysis Football Field Valuation

Precedent Transactions Implied Reference Range

  Implied EV Range

25th percentile Median 75th percentile

Analysis

Precedent transactions (TEV / EBITDAX) - $ 43.992,0 $ 61.588,8

DCF SAC (WACC 8%-8,4%, terminal growth 0%-1,8%) $ 48.121,8 $ 50.222,4 $ 52.695,2

DCF SAC + NPV synergies mid-point $ 63.428,1 $ 65.528,7 $ 68.001,4

 Berkshire Hathaway’s funding package
An expected increased risk on account of higher leverage resulting in an underpriced
funding package
Expected Financing Structure Credit Rating Agencies Overview

A (CreditWatch Negative) A3 (Under Review for Downgrade) A (Rating Watch Negative)

“We could lower or affirm the
ratings on Oxy when the
Anadarko acquisition closes. At
this time, we expect a downgrade
would not be more than two
notches based on the terms of
the proposed transaction.”.- 25
April 2019
“Should OXY’s bid prove
successful, a multiple notch
rating downgrade should be
expected. If the acquisition
closes as proposed and crude oil
prices remain supportive, OXY
would likely emerge with a weak
investment grade rating.”.- 24
April 2019
“While the transaction would
strengthen OXY's long-term
business profile, in the short to
medium term, Fitch expects it
will pressure OXY's credit
profile, given the high cash
consideration and the need to
debt finance a material part of
the offer.” – 25 April 2019

Valuation and Conclusion

Peer Companies Selection and Market Yield
 To value the investment, in light of the fixed quarterly dividends and the perpetuity of the preferred shares, we have
 With a substantial amount of debt to be used for the acquisition of Anadarko; c. $11.4bn to finance the offer value,
chosen a Constant Perpetuity model
excluding the funding needed to refinance the c. $19bn of debt held by the target, Anadarko faces negative rating
pressures due to the expected increases in leverage
 We discounted the $2m quarterly dividend by a quarterly market yield derived from peer companies
 S&P, Moody’s, and Fitch, expect Anadarko to remain in the IG rating range, despite a potential downgrade
 We computed the funding package’s value for the minimum and maximum yields obtained from peer companies, as
well as the mean and median of the set, an added the value of the warrant component of the investment
 For this reason, we have chosen a set of Investment Grade peer companies to obtain the discount rate of our Constant
Perpetuity model, as it appropriately reflected the market risk of Occidental’s preferred shares issuance
 We find that in every of the aforementioned cases, our model yields a higher value ($10.9bn - $13.0bn) than the $10bn
paid by Berkshire Credit Rating Market Yield
Company Date Issuance Sector Use of Proceeds
(05/19) (05/19)
 We thus conclude that the funding package is under-priced
17/07/2019 $700m Energy – Oil & Gas Refinancing BBB- 7.6%

MARKET YIELD CONSTANT PERPETUITY VALUE TOTAL INVESTMENT VALUE 28/11/2017 $600m Energy – Oil & Gas Refinancing BBB 6.5%

6.5% (Min) $12.3bn $13.0bn

13/11//2017 $950m Energy – Oil & Gasl Refinancing BBB- 7.8%
7.3% (Mean) $11.0bn $11.6bn
13/11/2017 $550m Energy – Oil & Gas Refinancing BBB- 7.4%
7.4% (Median) $10.8bn $11.5bn

7.8% (Max) $10.3bn $10.9bn 04/10/2017 $800m Energy – Oil & Gas CapEx & Refinancing BBB- 7.4%

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 Valuation- Trading Comparables

Name Date Total EV (EUR) TEV/LTM Revenue TEV/LTM EBITDA

Bayerische Motoren Werke Aktiengesellschaft (XTRA:BMW) Dec-31-2019 168402.6 1.5 13.3
Ford Motor Company (NYSE:F) Dec-31-2019 169991.5 1.1 14.4
General Motors Company (NYSE:GM) Dec-31-2019 139027.5 1.0 8.7
Honda Motor Co., Ltd. (TSE:7267) Dec-31-2019 90241.5 0.7 7.4
Hyundai Motor Company (KOSE:A005380) Dec-31-2019 70546.9 0.8 15.4
Mercedes-Benz Group AG (XTRA:MBG) Dec-31-2019 209745 1.1 16.4
Renault SA (ENXTPA:RNO) Dec-31-2019 58016.1 1 8.2
SAIC Motor Corporation Limited (SHSE:600104) Dec-31-2019 42084.6 0.3 9.4
Volkswagen AG (XTRA:VOW3) Dec-31-2019 281231.3 1 8.5

25th Percentile 0.75x 8.35x

Median 1.00x 9.40x
75th Percentile 1.10x 14.90x

Valuation using medians LTM Revenue LTM EBITDA

Target performance indicators* 165149.6 16916.6
Implied EV 165149.6 159016.04
- Net Debt -12,206 -12,206
- Minority Interests -2,538 -2,538
- Pensions -9,852 -9,852
Implied equity value 1,40,554 1,34,420
Implied price per share 45 43

 With a substantial amount of debt to be used for the acquisition of Anadarko; c. $11.4bn to finance the offer value, excluding the funding needed to refinance the c. $19bn of debt held by the target, Anadarko faces negative rating pressures due to the
expected increases in leverage

 S&P, Moody’s, and Fitch, expect Anadarko to remain in the IG rating range, despite a potential downgrade

 For this reason, we have chosen a set of Investment Grade peer companies to obtain the discount rate of our Constant Perpetuity model, as it appropriately reflected the market risk of Occidental’s preferred shares issuance

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 Recommendation

Higher premium paid by Occidental, on account of higher annual synergies ($2bn) compared to Chevron ($1bn)

Higher cash component in Occidental’s offer, resulting in lower risk and uncertainty coming from share price fluctuations

No shareholder voting, ensuring deal closure after acceptance of the offer

Lower risk correlated to increase in leverage coming from debt raised for funding, due to friendlier acquisition financing
(Berkshire Hathaway)

Shareholder gain (Johannes)

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Appendix
 Worth of the OXY May-05 offer to APC shareholders

Assumptions
Assumptions OXY pre-transaction
TEV OXY USD MM $ 60,000 TEV OXY USD MM $ 60,000
TEV APC USD MM $ 40,000 Debt Outstanding USD MM $ 10,317.00
PV Projected synergies
Assumptions USD MM $ 10,000 OXY Cash and Cash Equivalents
TEV OXY USD
USD MM
MM $
$ 3,033.00
60,000
Proceeds
TEV OXY from asset sale USD
USD MM
MM $$ 8,800
60,000 Net
DebtDebt
Outstanding USD
USD MM
MM $
$ 7,284.00
10,317.00
BH
TEVFunding
APC USD
USD MM
MM $$ 10,000
40,000 Equity valueand Cash Equivalents
OXY Cash USD
USD MM
MM $
$ 52,716.00
3,033.00
Break-Up fee synergies
PV Projected USD
USD MM
MM $$ 1,000.00
10,000 Shares
Net Debtoutstanding MM
USD MM $ 755
7,284.00
Corporate tax rate
Proceeds from (a)sale
asset USD MM% $ 25%
8,800 Equity
Equity value
value per share USD/share
USD MM $
$ 69.82
52,716.00
BH Funding USD MM $ 10,000 Share
Sharesprice (May-03 2019)
outstanding USD/share
MM $ 57.95
755
OXY revised
Break-Up fee offer (May 5-2019) to acquire APC by purchasing 100% of common
USD MMstock
$ 1,000.00 Equity value per share USD/share $ 69.82
Cash portion
Corporate tax rate (a) USD/APC share % $ 59.00
25% APC
Share(pre-acquisition)
price (May-03 2019) USD/share $ 57.95
Share portion OXY shares/APC share 0.2934 TEV APC USD MM $ 40,000
OXYrevised
OXY revised offer
offer (May(May-05
5-2019) to19) to acquire
acquire 100% of APC
APC by purchasing common
100% of stock
common stock APCOutstanding
Debt pre-transaction
APC (pre-acquisition) USD MM $ 16,417.00
Offer
Cash premium
portion as per APC market value: USD/APC share $ 59.00 Cash & Cash equivalents
TEV APC USD
USD MM
MM $
$ 1,295.00
40,000
Premium / share
Share portion USD
OXY shares/APC share $ 3.28
0.2934 Net
DebtDebt
Outstanding USD
USD MM
MM $
$ 15,122.00
16,417.00
Premium USD MM $ 1,655.38 Shares
Cash & Outstanding
Cash equivalents MM
USD MM $ 504.30
1,295.00
Offer premium as per APC market value: Equity value
Net Debt USD
USD MM
MM $
$ 22,431.00
15,122.00
Offer premium
Premium / shareas per implied APC equity value USD $ 3.28 Equity
Sharesvalue / share
Outstanding USD
MM MM $ 44.48
504.30
Premium / share USD MM $ 35.01
1,655.38 Share
Equity price
value(May-03 2019) USD
USD MM $
$ 72.72
22,431.00
Premium USD MM $ 17,653.75 Minority interest
Equity value / share USD
USD MM
MM $
$ 2,447.00
44.48
Offer premium as per implied APC equity value Share price (May-03 2019) USD $ 72.72
Premium / share USD $ 35.01 Minority interest USD MM $ 2,447.00
Premium USD MM $ 17,653.75

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 Worth of the OXY May-05 offer to APC shareholders Acquisition financing
Cash portion USD MM $ 29,754
New debt (preferred shares) USD MM $ 10,000.00
New debt (other) USD MM $ 10,953.70
PV (tax shield from new debt) (b) USD MM $ 2,738.43
OXY shares issued MM 147.96
Acquisition financing
Acquisition financing Acquisition financing OXY post-transaction (NewCo pro-forma)
OXY (NewCo - post-acquistion pro-forma)
Cash portion Cash portion USD MM $ 29,754 USD MM $ 29,754
Debt Outstanding USD MM $ 37,687.70
New debt (preferred shares) New debt (preferred shares)
USD MM $ 10,000.00 USD MM $ 10,000.00
Preferred shares USD MM $ 10,000.00
New debt (other) New debt (other) USD MM $ 10,953.70 USD MM $ 10,953.70
Cash and Cash Equivalents (c) USD MM $ 3,328.00
PV (tax shield from new debt) (b) PV (tax shield from new
USDdebt)
MM(b)$ 2,738.43 USD MM $ 2,738.43
Net debt USD MM $ 44,359.70
OXY shares issued OXY shares issued MM 147.96 MM 147.96
TEV (d) USD MM $ 111,738.43
OXY (NewCo - post-acquistion pro-forma) OXY (NewCo - post-acquistion pro-forma)
Equity value USD MM $ 64,931.73
Debt Outstanding Debt Outstanding USD MM $ 37,687.70 USD MM $ 37,687.70
Shares Outstanding MM 902.96
Preferred shares Preferred shares USD MM $ 10,000.00 USD MM $ 10,000.00
Equity value/share USD $ 71.91
Cash and Cash Equivalents (c) Cash and Cash Equivalents
USD MM (c) $ 3,328.00 USD MM $ 3,328.00
Net debt Net debt USD MM $ 44,359.70 USD MM $ 44,359.70
How much is OXY's revised offer worth to APC shareholders?
Current stock price APC USD $ 72.72
TEV (d) TEV (d) USD MM $ 111,738.43 USD MM $ 111,738.43
Cash portion received / APC share USD $ 59.00
Equity value Equity value USD MM $ 64,931.73 USD MM $ 64,931.73
Equity value received / APC share USD $ 21.10
Shares Outstanding Shares Outstanding MM 902.96 MM 902.96
Value of total compensation / APC share USD $ 80.10
Equity value/share Equity value/share USD $ 71.91 USD $ 71.91
Worth of the revised offer to APC shareholdersStockholder gain / APC share (vs APC market value) USD $ 7.38
How much
How much is OXY's revised offer worth to APC shareholders? is OXY's revised offer worth to APC shareholders?
USD $ 35.62
Current stock price APC Current stock price APC USD $ 72.72 USD $ 72.72
Cash portion received / APC share Cash portion received / APC
USDshare
$ 59.00 USD $ 59.00
Equity value received / APC share Equity value received / APC share
USD $ 21.10 USD $ 21.10
Value of total compensation / APC share Value of total compensation / APC
USD $ share80.10 USD $ 80.10

Stockholder gain / APC share (vs APC market value) Stockholder gain / APC share
USD(vs$ APC market
7.38 value) USD $ 7.38
Stockholder gain / APC share
USD(vs$ APC standalone
35.62 equity value) USD $ 35.62

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Precedent Transactions Reference List