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JANA May Raise $1.8B Offer for Houston Exploration, Demands Action

JANA Partners LLC said Thursday that it's about time the Houston Exploration Co. board of directors get moving on its offer to buy the company for $62 per share in cash. In a letter sent to the board, JANA Managing Partner Barry Rosenstein offered to enter into a confidentiality agreement in exchange for permission to begin immediate due diligence, which Rosenstein said could lead to a sweetened offer price.

He said JANA has increased its ownership in Houston Exploration to 12.8% from 12.3% since making its offer on June 12 and is currently its largest shareholder. Nevertheless, Rosenstein said JANA still has not received any inquiries from Houston Exploration or any attempts to begin discussions, despite individual calls to each member of the board.

"This silence is of course consistent with the board's response to our many private and public attempts to begin a substantive dialogue," said Rosenstein in his letter.

"While this communications barrier has given us no choice but to address the board publicly, our preference is to acquire the company on a negotiated basis through direct discussions with the board," he said.

Rosenstein added that he was putting the board on "clear notice that it would evidence tremendous bad faith and a disregard for their duties in our opinion were they to use this period, which the board has staked out for consideration of the company's future, to silently pursue overpriced acquisitions.

"We remain prepared to take all necessary action, including holding directors personally liable if warranted and taking all appropriate action to prevent such transactions, should the board do so."

Houston Exploration issued a statement Thursday that it is reviewing JANA's proposal and would respond in "an orderly manner."

"When the Board has completed its review it will advise shareholders of its position on the proposal," the company said. Lehman Brothers Inc. is serving as its financial advisor and Akin Gump Strauss Hauer & Feld LLP is its legal advisor.

JANA previously demanded that the company open its books and provide it with numerous documentation detailing executive compensation and meetings leading up to recent asset sales, particularly a $590 million sale of its offshore Gulf of Mexico assets. Houston Exploration recently stated its intention to use the proceeds from the sale to pay down debt and buy onshore exploration and production assets. But JANA called on the company to use proceeds to maximize shareholder value through a $650 million share repurchase and the exploration of strategic alternatives, including a sale of the company.

JANA said that Houston Exploration's reluctance to heed its sound investment advice is only the latest in a string of mismanagement incidents that include corporate waste, pursuing expensive acquisitions and inefficient debt repayment.

In an open letter sent to the company's board earlier this month, Rosenstein charged Houston Exploration with corporate waste and breach of its fiduciary duty to shareholders. He said the board has overseen a "massive transfer of shareholder value to company executives," particularly CEO William Hargett, over the last several years. He cited "massive compensation increases" for Hargett -- more than a 500% between 2003 and 2005 -- and other executives "in exchange for the paltry returns they have generated during a time of massive growth in the oil and gas exploration industry."

Houston Exploration responded to this onslaught by agreeing to provide some of the documents that JANA requested but not all. While it agreed to provide minutes of board meetings in which executive compensation and employment agreements and bonuses were discussed, the company rejected requests for other documents on grounds that they were "irrelevant" or the demand was "overly broad, vague and unduly burdensome."

Rosenstein said the company's response fell well short of what was required. Jana then publicly offered to buy the company for $1.8 billion (see NGI, June 19).

Houston Exploration operates mainly in South Texas, the Arkoma Basin of Arkansas and Oklahoma, East Texas, the Uinta and DJ Basins in the Rocky Mountains, and the Gulf of Mexico. As of Dec. 31, 2005, it had net proved reserves of 861 Bcfe. JANA is a hedge fund with more than $5 billion in assets.

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