Enron and subsidiary Enron Oil & Gas (EOG) set a plan inmotion Tuesday to formally part ways, as the two agreed on atransaction that would establish EOG as a widely held publiccompany that will be independent of Enron. Under the all-stockagreement, Enron will exchange 62.27 million of its 82.27 millionshares of EOG common stock for EOG’s China and India operations. Inconnection with the exchange, EOG will contribute $600 million incash to one of EOG’s India subsidiaries that will be transferred toEnron.
The net effect of the share settlement agreement will reduceEnron’s ownership share of EOG from approximately 82.27 millionshares or 53.5 %, to 20 million shares, or between 16-17%. Once thedeal is closed, the EOG board of directors will be reconstituted,with all Enron officers and directors currently serving as EOGdirectors, resigning their positions on the EOG board.
“While EOG’s North American operations are among the best in theindustry, they are no longer strategic to Enron’s North Americanenergy businesses, as we have ready access to gas supplies in thiswell-developed market. The China and India operations providevaluable supplies to meet growing energy demand in these regionsand are very strategic to our international activities,” saidKenneth L. Lay, Enron CEO.
EOG will issue additional equity to fund the $600 million partof the transaction. The Bank of America committed to give EOG asenior credit facility of up to $1.3 billion, which could also beused to fund the transaction.
“We expect the transaction to be immediately accretive to cashflow per share,” said EOG Chairman Forrest E. Hoglund. “Thetransaction also will remove the uncertainty of our ownershipstatus and will provide EOG with greater access to both debt andequity capital with which to grow its businesses. We are extremelyexcited about our platform for growth in North America and Trinidadand will continue to seek new international concessions.”
Solving the uncertain ownership issue is a coup for EOG, saidSteve Smith, an analyst with Dain Rauscher Wessels. “The overhangof this (ownership) issue had been a depressant on companymanagement, employees and shareholders. I mean, here’s a companythat went up for sale, but nobody came to the party. The resolutionis a positive development.” Smith estimated the deal will cause a16% improvement in cash flow for EOG in 2000.
Another result of this transaction will be a more active EOG,Smith said. “When another company has 53% of your stock,maneuverability in terms of deal-making becomes difficult. Now thatit has more freedom, I look for it to enter into an ‘explore andexploit’ deal in the Gulf of Mexico, similar to the deal Apachemade with Shell some months ago (See Daily GPI, April 30).”
The transaction has been approved by the boards of bothcompanies and has been recommended by a special committee ofindependent directors of the EOG board. The transaction, which isexpected to be completed by Aug. 31, does not require anygovernmental approval.
“It is just a strategic move for us to get out of the NorthAmerican market,” said Enron spokesperson Karen Denne. “Now we canput the resources we normally spend on EOG into new and developingmarkets.”
The assets in India and China are examples of Enron’s newdirection, Denne added. When the deal with EOG closes, Enron willhave 30% interest in three Indian energy fields (one gas field, oneoil field, and one oil and gas field), as well as a productionsharing agreement with the Chinese government for the Sichuan fieldin China.
Zach Wagner, an analyst with Edward Jones, said the overseasassets were the key aspect of the deal. “India has a growing energymarket, and Enron has been trying to establish a firm foothold inIndia for quite some time. These assets add major long-termpotential to Enron’s portfolio.”
The price was also right, according to Wagner. “Enron did notoverpay at all. Judging by EOG’s current stock price, Enron isgiving up around $1.2 billion, but getting back $600 million andvaluable assets as well.”
Both Wagner and PaineWebber analyst Ron Barone said this movealso makes sense for Enron because it reduces its exposure to themature North American energy market. “For all intents and purposes,Enron will effectively be out of the domestic exploration andproduction (E&P) business by year-end,” Barone said,”ultimately having greatly reduced long-term commodity price risk.”
The deal contained a lock-up period where Enron cannot sell itsremaining 20 million shares of EOG for six months. Enron does,however, have the right to sell 10 million in convertiblesecurities, which will be automatically exchangeable into EOGshares. Barone said Enron will have all 20 million shares soldshortly after the lock-up period ends.
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