Kerr-McGee Spins off TiO2 businessKerr-McGee to Spin Off, Sell Unit
03.08.2005, 05:46 PM
Oil and gas firm Kerr-McGee Corp. said Tuesday that its board approved the possible sale or spinoff of the company's chemical business, and authorized Kerr-McGee to proceed with a share repurchase program initially set at $1 billion.
The board expects to expand the share buyback plan during the chemical business separation.
"We do not believe that the value of our chemical business is adequately reflected in our market valuation," said Chairman and CEO Luke R. Corbett. "For some time, the board has been considering the separation of chemical, and current market conditions for this industry now make it an ideal time to unlock this value for our stockholders."
Kerr-McGee's chemical unit has gross production capacity of 624,000 tonnes per year of titanium dioxide, an inorganic white pigment used in paint, coatings, plastics, paper and many other products. The company's titanium dioxide pigment is marketed under the Tronox brand.
Kerr-McGee will mainly finance the stock buyback program with free cash flow, which is projected to be about $850 million in 2005. The company said it will maintain its plan to retire an additional $450 million of debt maturities due in 2005, and reiterated its commitment to maintain an investment-grade credit rating.
In addition, Kerr-McGee said its board unanimously rejected a suggestion from a group headed by billionaire investor Carl Icahn that proposed a volumetric production payment transaction for 250 million barrels of oil equivalent.
"Mr. Icahn's proposal of a VPP of this magnitude would extract the revenue from about 32 percent of our proved developed producing reserves, while leaving the company with 100 percent of the costs," said Corbett. "This would not leave the company with sufficient capital to develop the more than 425 million BOE of reserves currently booked as proved but undeveloped. As a result, we believe the value of our remaining proved reserves would be greatly reduced."
The company also said that since none of the proceeds from Icahn's proposal would be applied to debt reduction, it would have very serious negative implications to Kerr-McGee's capital structure and likely cause its credit rating to drop to junk status.
"We have seen VPPs employed productively on a much more prudent scale, but Mr. Icahn's proposal is tantamount to mortgaging the company's future simply to provide Mr. Icahn and his partners with some quick cash. We believe Mr. Icahn's analysis is flawed, and we will make our case directly with our stockholders," Corbett continued.
Lehman Brothers Inc. and JP Morgan are acting as financial advisers to the company.
Kerr-McGee shares gained $1.25 to close at $81.55, and rose 70 cents to $82.25 in after-market activity.