Mesa Petroleum disclosed Tuesday that it is under investigation by the Securities and Exchange Commission for possible securities violations that could be as minor as disclosure violations or as serious as insider trading.
Since the SEC issued its formal order of investigation April 26, the same day a federal judge in Los Angeles ruled that Mesa made false and misleading disclosures in documents pertaining to its efforts to gain control of Unocal, Mesa surmised that the investigation stems from that court ruling. David Batchelder, the company’s chief financial officer, said he can’t explain why the SEC investigation also encompasses a section of the securities laws dealing with insider trading.
Separately, Unocal said it is seeking a reversal of Monday’s ruling by a Delaware court that Unocal must include Mesa in a lucrative stock buy-back offer. The Los Angeles-based oil company also extended that offer, for 50 million shares at $72 each, to May 17, and moved a step closer toward transferring some of its best oil and gas reserves to a limited partnership.
Added to Confusion
In announcing its decision to appeal the Delaware Chancery Court’s ruling, Unocal added more confusion to what takeover specialists are calling one of the most confusing takeover battles ever waged.
The confusion centers on whether Unocal intends to proceed with its tender offer. The company’s announcement Tuesday said that Unocal will “await further developments in the Delaware litigation before making a final determination whether or not it will accept shares tendered by or on behalf of Mesa or its transferees.”
Some observers interpreted that statement as a hint that Unocal is going to back out of its offer, an interpretation that Unocal spokesman Barry Lane called inaccurate.
“I don’t believe they’re going to buy stock,” Mesa’s Batchelder said. “I think they moved their (offering expiration) date past the (annual) meeting so they don’t have to deal with that question from shareholders.”
Unocal’s annual meeting, originally scheduled for April 29, was postponed until May 13 while Unocal and Mesa correct what a federal judge called misleading documents.
Separately, the company said it has received board approval to prepare documents for the transfer of Unocal’s Gulf region oil and gas properties into a master limited partnership. It plans to file the documents with the SEC and apply for listing on the New York Stock Exchange “as soon as practicable.”
Assuming the SEC grants permission, Unocal said it will sell up to 10% of the initial partnership units to the public. Unocal will own the remainder of the units, the number of which has not yet been determined.
Subsequently, the company from time to time may buy more units from the partnership to distribute to Unocal shareholders as dividends. As with other dividends, these distributions would be taxable to shareholders.
But Unocal doesn’t believe that the arrangement would trigger a tax liability for the company because the units that it would distribute to shareholders would be acquired from the partnership with after-tax dollars and wouldn’t be drawn from the original pool of partnership units.
The distinction could be important. Some tax experts argue that companies lost the reason for forming limited partnerships and royalty trusts when Congress eliminated the tax breaks for such arrangements last year. (Unocal acknowledges that if certain tax-reform proposals were to pass, they would have “a significant adverse impact” on the limited partnership.)
Analysts predict that, by transferring one of the company’s crown jewels--the huge Gulf region properties, which have enough oil and gas reserves to be among the 20 largest oil companies--to a limited partnership, Unocal could prop up its stock by as much as $12 a share.
That’s because shareholders traditionally have paid more when they can clearly identify which reserves are backing their investment and put a value on the whole company based on a valuation given to the limited partnership. The prospect of dividends from the partnership also tends to boost the stock.
Since Unocal has not yet determined how many units it will initially carve out of the partnership, the value of those units isn’t yet known.
But Unocal estimates that the cash flow from the developed and undeveloped reserves composing the partnership was $3.9 billion at the end of 1984. So it is safe to say that the market value of the partnership will exceed $4 billion.
On other fronts, Unocal filed testimony with the SEC on Tuesday in which Fred L. Hartley, its chairman, president and chief executive, makes one of his most heated attacks yet on the group headed by Mesa Petroleum Chairman T. Boone Pickens Jr. In testimony before the House Judiciary subcommittee on monopolies and commercial law, he likened the Unocal-Mesa scuffle to the 1964 murder in New York of Kitty Genovese “as dozens watched but no one was willing to get involved. It was a national scandal. This is no less.
“Now is the time,” he said, “to call a halt.”
Elsewhere, analysts and sources close to the fight said Tuesday that some Unocal directors are uneasy about two recent legal rulings that dealt blows to Unocal’s many-faceted takeover defense. Their concern, the sources said, is aggravated by talk that some Unocal institutional investors are preparing to sue the company and its directors over the company’s anti-takeover maneuvers. Spokesman Lane said that Unocal would have no comment on these reports.
In addition, Mesa sources said Tuesday that the Labor Department is looking into Security Pacific National Bank’s role as trustee of Unocal’s employee stock ownership and profit-sharing plans. Both the Labor Department and Security Pacific refused to confirm or deny the report. But takeover experts said such inquiries are fairly routine during takeover fights.