Texaco and Pennzoil formally settled their historic $10.3-billion legal battle for $3 billion Saturday after Pennzoil agreed to drop its demand for interest on the debt.
After 48 hours of non-stop negotiations, Pennzoil Chairman J. Hugh Liedtke and Texaco Chairman James W. Kinnear signed the settlement agreement just before noon Saturday, officially laying to rest their companies’ tumultuous three-year fight over the rights to Getty Oil Co.
The settlement pact is the cornerstone of a reorganization plan that dictates how Texaco will emerge from bankruptcy proceedings, a haven it sought on April 12 to stop Pennzoil from enforcing the largest court judgment ever awarded.
Pennzoil’s multibillion-dollar judgment arose from a Texas court verdict in late 1985 holding that Texaco had illegally interfered with Pennzoil’s planned purchase of Getty Oil in 1984 when Texaco won Getty with a higher offer.
Shareholders to Vote
The settlement proposal will be filed with the U.S. Bankruptcy Court in White Plains, N.Y., on Monday morning. It is expected to be put to a vote of Texaco shareholders before March 1. At least two-thirds of the shareholders must approve the plan.
The plan is expected to win approval easily because both Texaco’s largest shareholder, New York financier Carl C. Icahn, and the shareholder committee formed by the court to help steer Texaco through bankruptcy gave their blessings to it on Friday.
Under terms of the agreement, Pennzoil must be paid the entire $3 billion in cash by April 14 and Texaco’s other creditors must receive their money--100 cents on the dollar--no later than April 24.
Texaco President Alfred DeCrane said in a telephone interview after the signing that Texaco will use some of its cash and short-term borrowing to pay off Pennzoil and its creditors. Later, it will decide which of its assets must be sold to pay off the short-term loans, he said.
Texaco Won’t Borrow
To appease its creditors, Texaco has agreed to refrain from borrowing money to pay off its debts and finance its reorganization.
The plan calls also for U.S. Bankruptcy Judge Howard Schwartzberg to confirm it no later than March 30. Texaco would then be free to emerge from bankruptcy proceedings.
Both sides are eager to wrap up the bankruptcy and settlement by March 30, which is the deadline for the U.S. Supreme Court to decide whether it will hear Texaco’s final appeal of the multibillion-dollar judgment. Once the court’s decision is known, both sides’ bargaining positions would change and the hard-won settlement would become moot.
The companies agreed not to withdraw Texaco’s request for a Supreme Court hearing of the case. But they will ask the court to postpone its decision until the plan is confirmed by the bankruptcy court, said Kenneth Klee, a lawyer with the Los Angeles firm of Stutman, Treister & Glatt, which is representing Pennzoil in the bankruptcy proceedings.
Pennzoil Chairman Liedtke, who has devoted virtually all of his time for three years to resolving this case and has said he will retire once the fight ends, said the settlement “offers an expeditious and sensible solution” to the legal fight. He was the first to sign the agreement Saturday morning.
Texaco will pay no interest on the settlement, which is a flat $3 billion. Until late Friday, the price tag had been $3.001 billion.
It was Liedtke’s decision late Friday to lower his settlement offer by $1 million and withdraw his demand for interest payments on the $3-billion debt that finally broke the latest impasse.
“Quite simply, that was all that Texaco would pay, and none of us were getting anywhere,” said one source close to the negotiations.
As early as Thursday night, Pennzoil’s demand that interest begin accruing on the debt from the date a plan is filed with the court was the only issue separating the companies from a settlement. The committees representing Texaco shareholders and creditors in the bankruptcy proceedings never budged from their position that a deal was not possible until that demand was lifted.
Removing ‘Legal Shackles’
Texaco Chairman Kinnear issued a statement saying Texaco decided to settle in order to “remove the legal shackles that have restrained our company . . . and get on with the competitive challenge before us.”
Once the plan is formally approved by shareholders and the bankruptcy court, Kinnear said, Texaco will focus its attentions on becoming “a stronger and more productive company.”
To that end, he said, Texaco’s investment banker, Morgan Stanley, has been enlisted to “undertake an aggressive” review of every Texaco asset and operation. What will emerge from that review, Kinnear said, is a major restructuring to “maximize shareholder value.”
Any business that “won’t contribute to our quest for competitive leadership” will be divested and all assets and operations “will be put to their best, most effective and most productive use,” Kinnear said.