Devon Energy Corp. and PennzEnergy Co. announced plans to mergeyesterday. While the deal was generally cheered by analysts, somecriticized PennzEnergy Chairman James L. Pate for letting thecompany go too cheaply without considering other options. Theannouncement also raised the hackles of PennzEnergy investors.

Houston-based PennzEnergy and Devon of Oklahoma City, OK, wouldmerge into a new Devon Energy Corp. PennzEnergy shareholders wouldreceive 0.4475 shares of common stock of the new company for eachPennzEnergy common share. Each share of Devon common stock would beconverted to one share of new Devon. As a result, PennzEnergyshareholders would own about 31% of the combined company, and Devonshareholders would own about 69%. The deal would create aninternational oil and gas company with an equity marketcapitalization of about $2.6 billion. Total enterprise value wouldbe about $4.7 billion. The company would rank in the top 10 of allU.S.-based independent oil and gas producers in terms of marketcapitalization, total proved reserves and annual production. Thecombined company would have proved reserves of about 2.1 Tcf of gasand 318.5 million barrels of oil, or 660 million Boe and would havecore operations onshore U.S., in the Gulf of Mexico and in Canadaand substantial international assets, highlighted by interests inAzerbaijan.

The merger is expected to be non-taxable to shareholders. Boardsof each company approved the merger, which is subject toshareholder and Federal Trade Commission approval. The combinedcompany would be headquartered in Oklahoma City, with operatingoffices in Oklahoma City, Houston, Denver and Calgary.

Analysts participating in a Thursday conference call withmanagements of both companies had enthusiastic cheers for Devon,but a couple had sharp words for the deal and PennzEnergy’s Pate.

“You made it clear that you not only were not willing to shopthe company but that you did everything to avoid doing that,” oneanalyst told Pate during the call. “And other than your [continued]current employment, I don’t feel we gain as PennzEnergyshareholders. I will tell you that we definitely will be votingagainst the deal.

“What Mr. Pate has done here has been a pattern for a couple ofyears. abrogating his obligations to shareholders here is clear.And we will be voting against this transaction. I think thateveryone looking at this should not be assuming this combination isgoing to go through because what was done here is wrong, and I’dask Mr. Pate why you would have so clearly avoided the potential toexplore what alternatives would be available in a sale beforemaking this decision.”

Pate countered that alternatives were explored, “but ouralternatives were not to sell the company. We looked at a number ofmerger opportunities, strategic mergers, acquisitions and otheropportunities to grow the company. The company is not for sale, andthis appeared to us to be a very, very attractive opportunity toget a very solid asset base in North America, to be a major playerin the North American gas market, to de-leverage the company andgain financial flexibility and to get a management with ademonstrated track record of delivering shareholder value.[Devon’s] valuation, of course, is much higher than ours. Theircash flow multiple is much higher and part of this transactionanticipates that PennzEnergy is going to get an uplift in itsvaluation as a result of all the things that I mentioned.”

The analyst was not placated. “The rights of shareholders andshareholder value has never been something that’s important to you,and I don’t say that lightly.”

Similar displeasure could be found on an Internet message boarddevoted to PennzEnergy. “Pate is not to be trusted, but he sure issmart enough to take care of himself. Chairman of the board of thecombined company is bound to make him a few bucks,” wrote oneposter. Another fretted that the deal links the price ofPennzEnergy shares to that of Devon shares. “If [Devon’s] stockdrops back to its normal valuation, do not underestimate thepotential financial fiasco to [PennzEnergy] shareholders.”

The deal’s critics found suspicious the timing of a Kerr-McGeeannouncement that it is reviewing its investment in Devon Energy.Kerr-McGee holds 9,954,000 shares, about 20%, of Devon commonstock. Kerr-McGee executives Luke R. Corbett, Tom J. McDaniel, andLawrence H. Towell resigned from the Devon board of directors.Kerr-McGee’s shares in Devon are subject to transfer limitationsset forth in Devon’s December 1996 standstill agreement withKerr-McGee, Devon said. In 1996, Kerr-McGee’s North Americanonshore assets were merged into Devon.

Devon and PennzEnergy executives said the Kerr-McGee executiveswere excluded from merger negotiations and were finding out aboutthe deal concurrent with the investment community.

Combined, Devon and PennzEnergy expect to realize cost savingsof $50-$60 million annually. Reductions are expected in operating,general and administrative, interest and exploration expenses.

J. Larry Nichols, Devon president and CEO, will be president,CEO and a director of the combined company. Pate will serve aschairman of the board. Devon’s executive staff will continue intheir current capacities. PennzEnergy also will contribute selectedexecutive staff. Devon and PennzEnergy each will designate sevenmembers to serve on the combined board of directors. John W.Nichols, Devon’s current chairman and Larry Nichols’ father, willserve as chairman emeritus.

Although he participated in the conference call, no mention wasmade of PennzEnergy CEO Stephen D. Chesebro’ and his future withthe company during the call or in the press release. “I get thefeeling that Chesebro (sic) is dead set against this merger,”posited one investor posting on the Internet. “I think Pate is theonly one who thinks this is such a great idea.” A PennzEnergyspokeswoman reluctantly told NGI that Chesebro’ will be leaving thecompany to pursue other interests.

Highlights of the combined company include the following: aproved reserve base of about 660 MMBoe (52% gas); U.S. provedreserves of 423 MMBoe; Canadian proved reserves of 144 MMBoe; netdaily production of 230,000 Boe (60% gas); a large inventory ofexploration opportunities with an aggregate 15 million netundeveloped acres of leasehold; expected cost savings of $50-$60million/year from reductions to operating, general andadministrative, interest and exploration expenses.

The merger is expected to be accounted for as a purchase. Thecompany expects to incur a one-time, non-cash charge to earningsdue to full-cost ceiling limitations related to purchase accountingadjustments. The charge is estimated to be in the range of$350-$500 million after-tax, depending upon commodity prices.Completion of the merger is expected in the third quarter of 1999.

PennzEnergy shares closed down 1/8 yesterday at 14 « in tradingthat was nearly nine times normal volume. Devon shares closed up 2¬ at 33 _ in trading that was nearly five and a half times normalvolume.

©Copyright 1999 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.