Chevron Corp., the oil giant that has been the subject of takeover speculation for weeks, said Monday that it would create an employee stock ownership plan to buy $1 billion worth of newly issued Chevron shares, raising the amount of stock in employee hands.
At the same time, the San Francisco-based company announced plans to buy back an equal number of shares on the open market over an unspecified period--Chevron's first stock repurchase plan in memory.
The net effect of the two actions will be to maintain the number of outstanding shares at about 342 million, increase employee stock holdings to 16% from 11% and allow the company to realize tax benefits, analysts said.
The company denied that the actions were intended to ward off suitors who may be interested in buying the company or forcing it to restructure. However, analysts said the moves would make a takeover more difficult for any outsider because they would add debt, remove shares from the open market, increase holdings in friendly hands and--in the short term--raise the total number of shares outstanding.
"If there is anyone searching for a company like Chevron, this would tend to put a higher level of price support under the stock," said George Gaspar, an industry analyst with the Robert W. Baird & Co. brokerage in Milwaukee.
Rumors have circulated since September that companies including Pennzoil Co. and British Petroleum have been buying up Chevron stock, driving the price up in heavy trading. So far, no large investor has emerged.
On Monday, trading in Chevron stock was halted briefly before the company's announcement. After it resumed, the market responded positively by sending the stock up $3.25 to close at $68.25 on volume of 3.33 million shares, making it the fifth-most active issue on the New York Stock Exchange.
The new employee stock ownership plan would be part of the company's existing profit-sharing and savings plan, which now holds about 11% of the company's outstanding stock. A newly created trust would borrow $1 billion from banks on behalf of the employee stock plan to buy the newly issued shares.
The move would increase Chevron's total level of debt, which stood at about $7.74 billion at the end of the third quarter, or 33.8% of the company's total equity plus debt, spokesman Larry Shushan said.
In the time before Chevron begins buying shares, the move would also increase the total number of outstanding shares, possibly diluting per-share earnings slightly, analysts added.
The dilution would be partly offset by tax benefits. Under the budget reconciliation bill passed by Congress last week, companies retained a tax deduction on dividends paid on shares held by an employee stock ownership plan. In the third quarter, Chevron paid a dividend of 70 cents per share, Shushan said.
Chevron will begin issuing new shares once it arranges financing for the plan in the next few days and will allocate the stock to employees in May, when the company normally makes a profit-sharing distribution for the first quarter of 1990, Shushan said.
The company will repurchase stock on the open market depending on market conditions, he added.
Some analysts said Monday's actions were consistent with Chevron's strategy of bolstering shareholder value, including a stated goal of raising average annual return to stockholders--including dividends and capital gains--to 15% through 1993 from its present level of about 8%.
But others argued that the new employee stock plan and buyback would do little to change the company's position.
"A lot of investors who own the stock had complained that the company was not doing anything (to bolster shareholder value), so this is (at least) some demonstration of shareholder sensitivity," said William H. Brown III, an analyst with the Kidder, Peabody & Co. investment firm in New York. "But it's not realistic to think they can go farther than that," particularly given their current financial condition, he added.
Analysts have said Chevron does not have enough cash to launch a major stock buyback program, especially since it paid mostly cash in its $2.6-billion acquisition last year of Tenneco Inc.'s oil and gas reserves.
Meanwhile, many analysts remained skeptical that a serious suitor for Chevron is waiting in the wings to mount a full-fledged bid for the company, which they estimated would cost more than $35 billion.
Still, rumors persisted Monday, centering mainly on cash-rich Pennzoil, and they gained momentum when Pennzoil requested confidentiality earlier this month for a quarterly filing with the Securities and Exchange Commission detailing its investments.
A Pennzoil spokesman declined to comment on the filing.