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Kerr-McGee Sues Icahn, Claims Breach of Antitrust Laws, Company Bylaws

Kerr-McGee Corp. filed a lawsuit against financier and shareholder Carl Icahn and his associates on Thursday, hours after Icahn sent a letter to CEO Luke Corbett urging the company to end its exploratory deepwater drilling program because it was costing the shareholders money.

The lawsuit by Kerr-McGee claims that Icahn and his group breached federal antitrust laws and violated of the company's bylaws. The lawsuit also asks a federal court to bar Icahn and his associates from voting with recently acquired shares, and it seeks to have their nominations as directors nullified.

In a letter to Corbett, Icahn said Kerr-McGee should stop "wasting" the company's money and said, "We believe KMG can spend its money much more judiciously than to continue spending money on high-risk exploration." The letter to Corbett also renewed Icahn's call for the company to sell its chemicals unit and sell up to 32% of future oil and gas production in order to buy back company stock and improve the share price.

Kerr-McGee defended its worldwide drilling program, and said its strategy has been historically successful.

The lawsuit follows several weeks of correspondence and accusations between the company and Icahn's group. Icahn and related affiliates have bought up about $500 million of Kerr-McGee's shares, and they now control, with Jana Partners LLC, about 7% of the company (see NGI, March 7).

According to the lawsuit, Icahn and his associates have "harmed the company and its stockholders by allowing defendants improperly to accumulate a sizable position in the company's stock and to withhold from the company information it needs to respond appropriately to director nominations."

Mark Weitzen, general counsel for Icahn Investment Partners, told the Associated Press that he had not seen the lawsuit, but he said it was without merit. "It sounds like there is not any substance to it, but we will see them in court," Weitzen said.

According to Kerr-McGee, Icahn and his associates violated the Securities and Exchange Act by acting as a group without disclosing the group's existence and the members' collective intent. The lawsuit also alleges that the group violated antitrust laws because at least one of the partners notified regulators of its share purchases after it acquired more than the limit of $50 million worth of shares.

The lawsuit also claims that the Icahn and his associates have not properly nominated themselves for election to the company's board because the nomination forms did not identify all the partners behind the nomination. The nomination forms also did not contain all necessary information, including detailed accounts of all company shares the nominees bought or sold within the past two years, according to Kerr-McGee.

Before the lawsuit was filed on Thursday, Kerr-McGee earlier in the week authorized management to proceed with a proposal to either spin off or sell its chemical business, and the board authorized a share repurchase initially set at $1 billion, which may be expanded after the chemical unit is sold or spun off. The company also blasted a proposal by financier and shareholder Carl Icahn, who has called on the company to set up a volumetric production payment (VPP) transaction for 250 million boe.

"We do not believe that the value of our chemical business is adequately reflected in our market valuation," said Corbett. "For some time, the board has been considering the separation of chemical, and current market conditions for this industry now make it an ideal time to unlock this value for our stockholders." After the chemical business is separated, Corbett said Kerr-McGee would "focus on our core competencies in exploration, exploitation, development and production."

The initial $1 billion share repurchase program primarily will be financed through the use of free cash flow generated from operations after planned capital expenditures, which is projected to be approximately $850 million in 2005. To ensure a portion of the projected cash flow, the company has hedged approximately 45% of its expected oil production and approximately 50% of its expected U.S. natural gas production for 2005 and expects to add to these positions from time to time, it said.

The independent also expects to use a portion of its existing bank credit facility and may issue new securities, which may be in the form of debt or perpetual preferred stock, to fund the remaining repurchase program. The company said it is maintaining its plan to retire an additional $450 million of debt maturities due in 2005. The board and management reiterated their commitment to maintain an investment-grade credit rating.

Standard & Poor's (S&P) on Wednesday cut the independent's debt ratings. S&P said that even though Kerr-McGee is unlikely to follow all of Icahn's recommendations, the size of the share buyback indicates a changing attitude toward credit quality.

"The downgrade is based on management's decision to pursue a more aggressive financial policy, in order to satisfy shareholder concerns, than that contemplated in previous ratings," said credit analyst Kimberly Stokes. "These actions are likely to be detrimental to credit quality in the near term and are not consistent with the 'BBB' rating level."

S&P cut Kerr-McGee's corporate credit rating to "BBB-," the lowest investment-grade rating. The "A-3" short-term corporate credit rating on the company also remains on CreditWatch with negative implications. Kerr-McGee has about $3.1 billion in debt outstanding pro forma for the recent $600 million debt-to-stock conversion.

"The ratings remain on CreditWatch with negative implications because of the external pressures on management to enhance shareholder value to the detriment of credit quality," Stokes said. The CreditWatch will be resolved in S&P's ongoing review of Kerr-McGee's credit profile.

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