Pennzoil Rejects Reported Texaco Offer of Stock Deal
In a new round of one of the highest-stakes corporate battles ever, Texaco Inc. apparently made an unsuccessful offer Tuesday to buy Pennzoil Co. at a hefty premium, rather than pay the smaller oil firm a record $11.1 billion in damages that had been awarded in November by a Texas jury.
Pennzoil declined to confirm the specifics of the rumored offer and issued a statement saying only that its board “unanimously rejected a proposal by Texaco to terminate the litigation between the two companies.”
Its statement added tersely: “Pennzoil has previously repeatedly advised Texaco that this type of proposal is entirely unacceptable.”
Pennzoil Chairman J. Hugh Liedtke added later in an interview: “They knew we wouldn’t accept it.”
When asked what would happen next, Liedtke said: “The ball’s in their (Texaco’s) court if they want to offer something sensible.”
Texaco officials declined comment on Tuesday’s developments.
Strong rumors of the possible deal swept Wall Street late Tuesday afternoon with such fury that they sent Pennzoil stock soaring $19.75 a share, to close at $83 as 1.12 million shares were traded. At one point, the New York Stock Exchange was forced to halt trading because of a flood of buy orders. Texaco stock, meantime, closed down 50 cents a share at $30.75 as 2.98 million shares changed hands.
If it had occurred, the deal would have put an ironic end to the companies’ bitter feud by merging the two combatants. Analysts said such an acquisition probably would be the least painful way for Texaco to escape legal penalties that it contended would send it into bankruptcy, and some even predicted that Texaco shareholders would come out of it in a better position than they had been before the lawsuit began.
As it is, the two may next face each other in New York on Thursday, when they have reserved time in federal District Court to resume a hearing on Texaco’s efforts to bar enforcement of the judgment against it.
“All I know is we’re preparing to go to New York for the hearing,” a Pennzoil attorney said.
Bought Getty Oil
Texaco had been ordered to pay what would be the largest award of damages in U.S. history, when the Houston jury found that Texaco had illegally blocked Pennzoil from completing a planned 1984 merger with Los Angeles-based Getty Oil Co. by stepping in and buying Getty itself for $10.1 billion.
Although some legal experts thought Texaco stood a good chance of being vindicated if it appealed the decision, the company did not want to face the prospect of years of litigation. Thus, several weeks ago, it agreed with Pennzoil to enter intense negotiations aimed at finding an alternative settlement.
Secrecy surrounding the talks was so tight that the principal negotiators moved from city to city for their sessions to avoid making their dealings public.
Rumors Surface
Rumors nonetheless surfaced late Tuesday that Texaco had agreed to acquire Pennzoil in a tax-free deal in which it would swap 3 1/2 of its shares for each Pennzoil share. Pennzoil stockholders would receive a rich profit on the transaction: For each share they held worth $63.25 at the beginning of Tuesday’s trading, they would receive Texaco stock worth more than $107.
But the deal also would be much less expensive to Texaco than paying the award demanded by the court or of trying to operate its company through years of uncertainty during the appeals process. K. Adam Leight, an analyst with Drexel Burnham Lambert Inc. in New York, said Texaco would be paying an estimated premium of between $1.5 billion and $2.7 billion above the current stock market value of Pennzoil’s stock.
Insiders of both companies, as well as those who are watching the negotiations closely from the outside, agree that the pressure remains heavy on the two firms to devise an out-of-court settlement.
Could Transfer Reserves
Among their remaining options are a transfer from Texaco to Pennzoil of oil reserves, possibly including the Kern River oil field near Bakersfield that Texaco acquired in its purchase of Getty.
Some in the industry have speculated that the two firms may agree to enter a joint venture, in which Texaco would contribute almost all of the assets, but give Pennzoil equal ownership.
Any agreement, analysts say, would likely be structured to minimize taxes.
“I would assume the key players in this at the moment are really the tax analysts,” the chief executive of one of two firms’ leading competitors said. “It almost certainly would involve assets, rather than cash.”
Karen Tumulty reported from Washington and Debra Whitefield from Houston.
