Phillips Petroleum Co. won its independence Monday for the second time in three months when New York financier Carl Icahn withdrew his offer for the Bartlesville, Okla., oil company.
Central to the settlement, reached by the two sides at 2:30 a.m. Monday, is a slightly sweetened competing offer from Phillips. Icahn, notified Sunday night by Phillips' investment bankers that a new, somewhat more lucrative offer had been unveiled, agreed almost immediately to drop his competing bid, according to sources close to the deal.
In exchange for $25 million, which Icahn said would partly cover his costs, the financier also agreed not to make another run at Phillips for eight years. His investment banker, Drexel Burnham Lambert Inc., is prohibited from financing any attempted takeover of Phillips for three years.
Icahn, who bought his Phillips stock for an average of $46 a share, is expected to make a profit of $50 million to $60 million on the deal. It was unclear whether Icahn would tender his shares to Phillips or sell them in the market.
Under its latest plan, Phillips will offer to swap debt securities with a face value of $62 per share for half of its 154.6 million outstanding shares. After the swap, Phillips intends to increase its annual dividend rate to $3 from $2.40 per share and to seek shareholder authorization for a 3-for-1 stock split and a new class of preferred stock.
Phillips Chairman William Douce, at a news conference Monday, placed the offer's value at between $56 and $57 a share. The range offered by securities analysts was $51 to $57, depending, they said, on the market value of the shares that remain outstanding after the swap.
The company's previous recapitalization proposal, which, as expected, didn't receive the required approval, was variously valued at between $48 and $53 per share.
Besides ridding itself of an unwelcome suitor, Phillips also transformed itself into "an unappetizing takeover target," in the words of Timothy J. Quaid, an energy analyst with the New York investment firm of F. Eberstadt & Co.
For one thing, Phillips proposes to take on a huge debt burden, which it would partly pay off by selling $2 billion of unspecified assets.
Moreover, the debt package contains a so-called poison-pill anti-takeover device. It prohibits future suitors from using Phillips' assets to help secure financing, a common tactic in leveraged buy-outs, without first paying off all of the $4.5 billion in new Phillips debt.
Bond Ratings Lowered
At the news conference, Douce said the company's debt would instantly jump to about $7.3 billion from the current $2.8 billion, leaving Phillips with debts equal to 70% or more of total capitalization. The company traditionally has kept its ratio of debt to capitalization at about 25%.
Two independent bond raters responded to the new offer by lowering the company's bond ratings, a move that will increase the cost of future Phillips borrowings.
Moody's Investors Service said it dropped its rating a grade because the new exchange offer "will have a significant negative impact on the company's credit quality, as its financial leverage will initially expand substantially with a reduction of some 70% in its equity base."
It also assigned a low Ba1 rating to the $1.1 billion of subordinated debentures and $300 million of preferred stock that Phillips will issue in connection with the exchange offer.
Standard & Poor's Corp., in slashing its Phillips' bond rating by two grades, said the company's "flexibility will be severely impaired for the next few years as Phillips concentrates on generating cash to reduce debt." That, in turn, will delay Phillips' efforts "to strengthen its reserve base, which has suffered from poor reserve replacement and high finding costs in recent years," the rating service said.
Phillips maintains that the new offer, crafted to satisfy shareholders "who supported our capitalization proposal but wanted a different type of transaction," will ensure that the company remains "a vital, competitive entity."
Icahn, whom many thought all along was more interested in scuttling the recapitalization plan than in actually owning Phillips, issued a statement Monday applauding the defeat of the recapitalization plan and calling the new offer "a better deal" for shareholders.
That accomplished, he said: "I am terminating my tender offer and consent solicitation and will not oppose the company's new plan."
Icahn had offered $60 face value in debt securities for each of 70 million Phillips shares. Analysts had valued the securities at about $55 per share.
Despite Icahn's favorable comment on the new Phillips deal, Wall Street greeted Monday's news unenthusiastically. Phillips' stock price finished the day at $50.125, up only 75 cents, in trading on the New York Stock Exchange. It was the exchange's most actively traded stock.
Sources close to the Icahn deal said it was clear from the speed with which the settlement proceeded once Phillips showed its hand that Icahn couldn't beat Phillips' "bird in the hand" and lacked the concrete financing he needed to buy Phillips. But a source in Icahn's camp said that "no one has any proof that that's the case."
Texas oilman T. Boone Pickens, who negotiated a settlement with Phillips last December to end his assault on the oil company, said Monday that he hasn't yet decided how he will dispose of his 8.9 million shares of Phillips stock.