Occidental to Buy Midcon for $3 Billion : Purchase of Pipeline Firm Seen Enhancing Natural Gas Holdings
Occidental Petroleum expanded into the natural gas pipeline business in a big way Wednesday by agreeing to the friendly $3-billion-plus purchase of a major Chicago-based company that is fighting off an unwanted takeover attempt by another firm.
The joint announcement by Occidental and Midcon, the nation’s fourth-largest gas pipeline company, confirmed rumors that swept Wall Street on Tuesday. The two firms said their boards unanimously approved the $75-per-share deal, subject to Midcon shareholder approval.
Occidental Chairman Armand Hammer called Midcon’s 30,000 miles of pipes a valuable complement to the huge reserves of natural gas that his company holds as a result of its 1982 purchase of Cities Service. He predicted “significant financial and operating benefits from the merger” and said Midcon “will quickly contribute major new net earnings and cash flow.”
The acquisition will make natural gas a significantly greater factor in Occidental’s overall business and will further tip revenue toward domestic sources and away from foreign sources that once dominated at the company.
Occidental said the merger will make it the nation’s 12th-largest industrial firm, with sales of about $22 billion. Occidental ranked 18th last year in Fortune magazine’s list of the 500 largest industrial corporations in the United States.
“It’s a great way to start the new year,” the 87-year-old Hammer said in a phone interview.
Hammer disclosed that Occidental for about six months has been studying whether to acquire a pipeline company.
Meanwhile, Midcon in late December became the target of an unfriendly takeover bid by a recently formed firm named WB Partners, a joint venture of Freeport-McMoRan of New Orleans and Wagner & Brown of Midland, Tex. The firm, apparently responding to the Occidental rumors, on Tuesday sweetened its offer for Midcon from $62.50 per share to $70. The firm had no comment on Wednesday’s announcement that a deal had been struck.
However, parties to the Occidental-Midcon talks noted that Occidental not only offered about $207.5 million more than the latest offer by WB Partners but was viewed by Midcon as financially better able to complete the deal.
The agreement was apparently thrown together in a matter of days after Midcon last week rejected WB Partners’ unwanted offer, though Hammer said Occidental was already familiar with the Chicago-based firm because of its recent review of the pipeline industry. He said the opportunity “came right out of the blue.”
He said First Boston, Occidental’s investment banker, approached Occidental and said it believed that a friendly merger could be worked out with Midcon. On Friday, Hammer and Occidental President Ray Irani flew to Chicago to meet with Midcon Chief Executive O. C. Davis.
Hammer said Occidental’s interest in a gas pipeline company stemmed from the 2.5 trillion cubic feet of gas reserves that it acquired when it bought Cities Service but that wasn’t being put to full use.
“A large part of that was set off and doesn’t reach a market,” Hammer said. “Midcon has plenty of room in its gas pipeline system for more gas.”
‘A Pretty Good Fit’
That makes sense to New York-based oil analyst Eugene Nowak of Dean Witter, who said: “I agree with that. Hammer’s trying to build a major enterprise and, if something fits, he does it. This might be a pretty good fit. I wouldn’t consider this a big surprise, like Iowa Beef. That was a surprise.”
Iowa Beef Processors, the nation’s largest beef processor, was acquired by Occidental in 1981.
Midcon is highly regarded by analysts for its access to so-called “old gas,” meaning natural gas that predates deregulation and thus is cheaper than more recently extracted gas.
“It’s an outstanding company,” said analyst Theodore Moreau of the Robert W. Baird investment firm in Milwaukee. “They have access to very low-cost, mostly old gas reserves. They probably have the lowest prices in the country. They’re also one of the best managers of pipelines. They know how to get gas and how to ship it.”
Midcon, which was spun off in 1981 from Peoples Energy Corp., a large Chicago natural-gas utility, earned operating profit of $156 million in the fiscal year ended Sept. 30. That was an increase of 6.9% on essentially flat revenue of $4.1 billion. Though the firm also has some oil and gas production and a drilling business, more than 90% of its revenues come from natural-gas transmission.
Terms of the agreement promise that Midcon will operate under its own name as a wholly owned Occidental subsidiary, remain headquartered in Lombard, Ill., and continue to be run by Chief Executive Davis under a long-term contract. Hammer said: “We’ll keep the independence of Midcon just as we did with Cities Service.”
The agreement, subject to approval by Midcon’s shareholders, calls for Occidental to pay $75 per share for half of Midcon’s 41.5 million shares of common stock. That would be followed by a merger in which Occidental exchanged 2.25 new shares of its common stock for each remaining share of Midcon stock. Despite the new Occidental equity, Hammer said the acquisition won’t dilute the company’s shares of stock.
Occidental said it will use cash and existing credit lines to finance the purchase, its first major acquisition since a planned $3.3-billion merger with Diamond Shamrock fell through last January. Occidental has been restructuring since then, reducing its debt and receiving a big cash infusion from last summer’s sale for $1 billion of half of its interest in a major new oil field in Colombia.
Irani said Occidental won’t have to sell off any of Midcon’s assets to help pay for the deal.
In an apparent move to block any new overtures from WB Partners or other suitors, the agreement grants Occidental an option to buy 51% of the outstanding voting power of the stock of a large Midcon subsidiary, Natural Gas Pipeline Co. of America, which operates almost 13,000 miles of Midcon’s 30,000 miles of pipe. It also granted Occidental an option to buy about 7.2 million shares of Midcon common stock.
