EXCO Resources Inc. last week formed a special committee to consider a buyout proposal from CEO Douglas Miller of $20.50/share cash, the Dallas-based natural gas-focused exploration and production company said.

Oilman T. Boone Pickens as well as two investment firms are said to be in on the offer, which is worth $4.36 billion. However, credit and financial analysts are wondering what the capital structure of the company would look like post buyout.

“I am pleased to express my interest in acquiring all of the outstanding shares of common stock of EXCO Resources Inc. (the company) at a cash purchase price of $20.50 per share,” Miller said in a letter to the EXCO board, of which he is chairman. “I have preliminarily discussed this proposal with Oaktree Capital Management LP on behalf of its funds and accounts under management, Ares Management LLC, on behalf of one or more of its funds under management, and Boone Pickens, and each has expressed an interest in pursuing the acquisition with me.”

The offer represents a 38% premium to the closing price preceding the proposal’s announcement of $14.83. Last Monday following the announcement shares rocketed about 35% to trade near the offer price at $20. Miller has a 2.15% stake in the company and Pickens owns 5%, while Oaktree holds about 16% and Ares Management has about 6%, according to Thomson Reuters.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) wondered aloud about the pricing of the offer in this era of weak natural gas prices. TPH cited a 21% decline since June in the 2011 New York Mercantile Exchange gas futures strip asked in a note: “How do the buyers make money at $20.50/share?” They said the proposal contains “an inherent bet on higher commodity prices.”

Meanwhile analysts participating in the company’s third quarter earnings call last week quizzed Miller on any deal’s potential effect on bondholders. Noting that in September the company closed a $750 million senior notes offering, one analyst asked if a significant change in the company’s capital structure would be fair to bondholders with the latest bond sale closing so recently.

“Who said I was the proposer of the change to the capital structure,” Miller replied, according to a call transcript prepared by Seeking Alpha. Miller said the analyst was “making some assumption that you shouldn’t be making” about the potential leverage of the company following a buyout. “…[W]hy don’t you wait and see the structure before you spank me,” Miller said.

Miller took the company private once before in 2003 after forming EXCO Holdings Inc. for that purpose. Cerberus Capital Management, LP backed that deal.

In an era of foundering gas prices and robust production, going private is seen by some as an attractive option. Quicksilver Resources of Fort Worth, TX, is in talks with a group of investors, including its CEO, over a deal that would take the company private (see NGI, Oct. 25).

EXCO is active in East Texas and North Louisiana, particularly in the Haynesville/Bossier Shale, the Vernon and Kelleys fields and the Cotton Valley Area. It is also active in the Permian Basin in West Texas and in the Marcellus Shale in Pennsylvania and West Virginia. EXCO also has interests in midstream assets in East Texas and North Louisiana.

Earlier this year EXCO acquired East Texas assets from Southwestern Energy Co. (see NGI, June 21). This followed deals with partner BG Group plc to acquire assets of Common Resources LLC in the Haynesville/Bossier (see NGI, April 26). BG and EXCO are also partners in the Marcellus (see NGI, May 17).

“…[O]ur after-tax NAV estimates the bid assumes a long-term gas price of $7/Mcf. That said, we view the buyout as somewhat opportunistic given the stock’s underperformance (down 30% year to date pre-bid — was $22.22 on Jan. 4, 2010) and current gas prices, as well as EXCO’s being set to generate production growth of 36% [compound annual growth rate]…” analysts at BMO Capital Markets Corp. said in a note Monday.

“…[W]e can’t argue for a higher valuation given our outlook for gas. We don’t see BG as a competing buyer as we don’t believe it would want to be operator of the [joint ventures] and it already has a 50% share.”

Shortly after the offer’s announcement, law firm Goldfarb Branham LLP said it was looking into the offer and alleged that shareholders could be shortchanged. Several other law firms said they were scrutinizing the offer on behalf of shareholders.

“Mr. Miller currently owns approximately 2.15% of EXCO’s shares and he has engaged in discussions with other significant shareholders that own about 27.5% of EXCO’s shares to participate with him in an acquisition of EXCO. The price appears to be unfair because at least one analyst has projected that EXCO’s true value is at least $29 per share,” said securities lawyer Hamilton Lindley.

Miller said in his letter to the board that he would continue as chairman and CEO following any deal and would plan to keep the EXCO senior management team in place. “I anticipate continuing to run the business in accordance with our current practice and maintaining the company’s valuable employee base, which we view as one of its most important assets,” he said.

“I would expect to reinvest a significant portion of my equity ownership as part of this transaction. The remaining funds necessary to consummate the transaction would come from senior management, outside investment partners and, as needed, third-party debt financing.”

Evaluation of the offer — and any others that might come — is expected by analysts to take anywhere from six to 12 months.

While the potential for an offer is up in the air, it creates uncertainty for the company, analysts at Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service said in recent notes.

“We believe the management buyout proposal set in motion a series of events that are likely credit negative,” said Stuart Miller, a senior analyst with Moody’s. “Until a decision is made, the evaluation process will be a distraction to the company’s management and employees, which increases the risk of a decline in operating performance.”

S&P analyst Patrick Lee said if a buyout does happen, increased leverage at the company could harm credit quality. “Depending on how the buyout proposal is ultimately structured, we could lower the ratings by one or more notches if leverage and capital protection materially worsen,” S&P said.

TPH said a competing bid from a strategic buyer wasn’t likely, “but good assets at the right price and opportunity for cost synergies makes a competitive bid possible.”

Moody’s said “a more highly rated entity may be willing to pay a premium to gain access to EXCO’s large natural gas asset base.” Such a scenario could be a positive for the company’s credit, Moody’s said.

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