Pennzoil OKs $3-Billion Plan in Texaco Fight

Efforts to settle the mammoth legal dispute between oil giants Texaco Inc. and Pennzoil Co. took a large step forward Friday as Pennzoil and a committee representing Texaco shareholders put aside their differences and agreed to jointly propose a $3-billion settlement.

Other details of the proposed agreement are still being worked out. But Pennzoil said it expects to file a joint plan with the bankruptcy court next Friday, at the earliest, proposing to settle for “not less than $3 billion in cash.”

The agreement between Pennzoil and the shareholders’ committee--in which Texaco’s largest shareholder, Carl C. Icahn, played a major role--was unexpected, but some parties active in the court-directed Chapter 11 reorganization of Texaco now predict that the two companies will finally negotiate a settlement after almost three years of trying, and perhaps as early as this weekend.

“We certainly regard what we’ve heard as hopeful,” said Jeffrey Hodgman, a senior vice president of Texaco creditor Metropolitan Life and acting chairman of the Texaco creditors’ committee. “I think it’s quite possible that Texaco and Pennzoil will get together over the weekend and settle the litigation part of this reorganization.”

If the combatants do not negotiate a private settlement this weekend in their dispute over a $10.3-billion judgment won by Pennzoil as a result of Texaco’s allegedly thwarting Pennzoil’s 1984 attempt to acquire Getty Oil Co., the committee representing Texaco’s creditors will meet early next week to consider the $3-billion settlement proposal, Hodgman said.

Under terms of a recent ruling by U.S. Bankruptcy Court Judge Howard Schwartzberg, the plan must be approved by the creditors’ committee before it can be put to a vote of all Texaco shareholders.

Texaco’s OK Not Needed

Assuming that the creditors and at least two-thirds of Texaco shareholders agree to the plan, the bitter three-year fight could finally end--and without Texaco’s approval.

“Texaco management’s been sidestepped,” said Frederick P. Leuffer, an analyst with the C. J. Lawrence brokerage firm. “This is very good news for both (sets of) shareholders.”

Schwartzberg, at a hearing on Dec. 2 in White Plains, N. Y., gave Texaco 40 more days to come up with its own plan for emerging from bankruptcy--an avenue Texaco chose in April to forestall Pennzoil’s collection of the damage judgment.

But the judge said also that, if Pennzoil and the committees representing Texaco creditors and shareholders could agree on a plan of reorganization that included a settlement of the dispute, he would void Texaco’s exclusivity period so Texaco shareholders could vote on the plan.

Approval by the shareholders would override objections by Texaco.

Board Chides Committee

The mood was grim Friday at Texaco’s White Plains headquarters, where the board of directors met for several hours on Thursday and Friday. The board chided the shareholders’ committee for acting “unilaterally” and said that it much prefers the structure of settlement offers that had been under discussion last week to the one proposed Friday.

Last week, the creditors’ committee had proposed that Texaco immediately pay Pennzoil a nonrefundable $1 billion in exchange for a promise that it would never be required to pay more than $3.5 billion.

Hodgman said that the creditors had always favored a lump-sum settlement over the so-called “base and cap” approach favored by Texaco but that that approach had been the only way to bring the two sides back to the bargaining table.

“Texaco believes that a more economic . . . settlement could have been achieved with Pennzoil if the equity committee had not acted unilaterally,” the company said. It noted that Texaco and Pennzoil had been in “constructive negotiations” this week and that Texaco had told the shareholders’ committee it “believed that such negotiations could have been fruitful” in holding the settlement to less than $3 billion.

Still Intends to Appeal

Texaco said also that it still intends to ask the U.S. Supreme Court to hear its appeal.

Wall Street was elated by the proposed settlement. Texaco’s stock was the third most actively traded issue on the New York Stock Exchange, with 2.8 million shares changing hands. It closed at $35.50 a share in composite trading, up $3.50.

Pennzoil stock also rose sharply--by $6.75 a share to $79.75.

But analysts were mixed in their opinions of the proposal.

“Three billion dollars strikes me as an excessive number,” said Rosario Ilacqua, vice president for equity research at the New York investment firm of Nikko Securities Co. International.

But, in a report to clients last month, analyst Leuffer predicted that the two sides would eventually settle for $3 billion, which he predicts “wouldn’t be too onerous” for Texaco. Before the Texas Supreme Court upheld lower court rulings in Pennzoil’s favor last month, Pennzoil was demanding $4 billion from Texaco and Texaco was offering about $2 billion.

Firm Has Cash Hoard

Analysts were in agreement, however, on Texaco’s ability to pay Pennzoil $3 billion. At the end of September, Texaco reported having $4.2 billion in cash and marketable securities. And analysts said that at least $1.5 billion of that would be immediately available for payment to Pennzoil.

The remainder could easily be raised by selling certain Texaco assets, which several analysts think Texaco is sure to do anyway once the Pennzoil dispute is over.

“Competitors’ analysis departments have been very busy evaluating Texaco’s assets because everyone is sure there will be a restructuring once this is over,” Leuffer said. “Management understands that the shareholders have gone through an awful lot and, when this is all done, I am sure they will find a way to reward everyone who hung in there with them.”

Among the most likely properties to be sold off, he thinks, are Texaco Canada and the half of CalTex, an energy firm, that it still owns. Chevron owns the other half and has expressed interest in buying the remainder.

Both analysts and participants in the bankruptcy organization remained puzzled Friday over the quick change of heart on the part of the Texaco shareholders’ committee. Only three weeks ago, its members were still strongly supportive of Texaco management’s resistance to a settlement.

Icahn Shares in Credit

But sources close to the case said credit must be shared by the creditors’ committee--which persuaded Judge Schwartzberg to consider lifting Texaco’s exclusivity period for filing a plan of reorganization--and by Icahn, the New York financier who recently bought 12.3% of Texaco and immediately went to work trying to bring the parties together.

Last week, Icahn called Pennzoil Chairman J. Hugh Liedtke, and the two of them--along with Pennzoil’s chief trial counsel, Joseph D. Jamail Jr., and Icahn’s advisers--met in New York to discuss Pennzoil’s requirements.

Subsequently, Icahn met with representatives of the Texaco shareholders’ committee, and that committee then made a formal proposal to Pennzoil’s board on Wednesday. The board agreed to it.

The biggest stumbling block still remaining could be the creditors’ committee. Hodgman said the $3-billion figure is not out of line, but he said the creditors--especially long-term bondholders--must be convinced that the ratings of their debt will be as high after the reorganization as it was before Texaco went into Chapter 11 proceedings.

“We have to make sure there is ongoing protection in any plan for the long-term creditors, who suffered significant credit deterioration when Texaco went into bankruptcy,” Hodgman said.