Allied Will Sell 50% of Oil Subsidiary for $1.7 Billion

Allied Corp. said Monday that it had agreed in principle to sell 50% of its oil and gas unit, Union Texas Petroleum, to an investment group for $1.7 billion.

Allied said the proposed leveraged buy-out calls for the group to pay Allied $1.4 billion in cash and $300 million in Union Texas preferred stock.

The group is led by Kohlberg Kravis Roberts & Co., a New York investment banking firm that specializes in leveraged buy-outs, and the group includes members of Union Texas management.

Use Borrowed Funds

In a leveraged buy-out, the purchase is made with largely borrowed funds that are expected to be repaid either with the target company’s operating revenue, or from the sale of its assets. It is also common in leveraged buy-outs for executives of the target company’s management to participate in the acquisition.

Allied is a major aerospace, industrial and chemical concern based in Morris Township, N.J. Allied said that in 1984, Union Texas contributed about 37% to its total net income of $488 million, and 19% to its total sales of $10.7 billion.

Allied Chairman Edward L. Hennessy Jr. said in a statement that the sale of the Union Texas stake “makes sense because it unlocks the value of our oil and gas assets, which we believe are undervalued by the stock market.”

Monday’s announcement was well received on Wall Street. Allied’s stock jumped $3.50 a share to $39.875 on the New York Stock Exchange.

Can Still Participate

Alluding to the softness in oil and gas prices, Hennessy said Allied’s remaining half-share in Union Texas would allow Allied to “continue to participate in the growth of a profitable, well-run business and in the increased cash flow expected when oil and gas prices turn up again.”

But he said the sale of half of Union Texas is part of Allied’s “continuing effort to restructure the company toward businesses with higher-value-added products based on more advanced technology.”

Proceeds from the sale initially would be used to help reduce Allied’s debt and to buy back its common and preferred stock under previously announced programs, Hennessy said.

Eventually, he added, funds from the sale also would be used “to finance acquisitions in our core businesses, particularly aerospace, automotive and chemicals.”