OKLAHOMA CITY – The board of oil and gas company Kerr-McGee (KMG), in an effort to head off a proxy battle with billionaire investor Carl Icahn (search), authorized a tender offer to buy back up to $4 billion of the company's common stock.
The company's shares surged on the news that the buyback would be at a price between $85 and $92 per share. Its shares climbed $7.72, or 10.4 percent, to $81.69 on the New York Stock Exchange (search).
Icahn and a group that includes Jana Partners LLC (search), who collectively own about 7.6 percent of Kerr-McGree's shares, had recently indicated they would attempt to get elected to the company's board at the May 10 annual meeting.
Under the settlement, Kerr-McGee said it will drop its federal lawsuit that said Icahn and his associates violated federal antitrust laws and the company's bylaws in their efforts to buy more stock in Kerr-McGee and nominate their own directors to the company's board.
The company said based on the repurchase program and the previously announced separation of its chemical business it has received written notice from the Icahn Group and JANA Partners confirming that they will immediately cease proxy solicitation activities. The Icahn Group and JANA Partners will withdraw their alternate board nominees from consideration for election to the board of directors of Kerr-McGee on successful completion of Kerr-McGee's repurchase program.
The minimum tender price for the repurchase program reflects a 15 percent premium over Wednesday's NYSE closing stock price of $73.97. Kerr-McGee said it expects to launch the tender offer on or about April 18. The company currently has about 163.4 million shares outstanding.
The company said it expects the share repurchase to add to earnings and cash flow per share.
"With the proceeds from the separation of the chemical business, divestitures of selected oil and gas assets, and cash flow, which has been underpinned by an expanded hedging program for 2005 through 2007, we expect to be able to reduce debt in the range of about $3.5 billion to $4.5 billion during the next two years," said Chairman and CEO Luke R. Corbett.
Kerr-McGee estimates the potential divestiture of oil and gas properties valued at $2 billion to $2.5 billion. The divestitures are expected to include shorter-life properties located on the Gulf of Mexico shelf, in the British sector of the North Sea and in certain U.S. onshore areas.
The targeted divestitures are expected to represent about 20 percent to 25 percent of current production and about 10 percent to 15 percent of proved reserves.
The tender offer replaces the initial $1 billion share repurchase program announced on March 8. Under the initial program, the company repurchased $250 million of Kerr-McGee shares in the open market.
Kerr-McGee has obtained commitments from JP Morgan and Lehman Brothers Inc. to finance the tender offer and ongoing working capital needs. The company said it expects its credit rating to be lowered for the near term as a result of the increased financing levels.
In addition, Kerr-McGee's board of directors has decided to lower the dividend on the company's common stock to 20 cents per share, compared with the 45-cent dividend paid Jan. 3. The dividend is expected to be revised for the quarter ending June 30.