U.S. Steel Corp.'s $4.3 billion agreement to buy Texas Oil & Gas Corp. is upsetting stockholders in both companies, oil and gas industry analysts said yesterday.
According to analysts, many holders of the gas company's stock believe their company is being sold for less than fair market value, and many U.S. Steel shareholders are angry because their stock would be diluted when new U.S. Steel stock is issued to consummate the deal.
"If you were a U.S. Steel shareholder who went to bed feeling allright" the night before the merger agreement, "you probably woke up the next day shaking your head," said John Olson, an oil and gas industry analyst with Drexel Burnham Lambert Inc. "I think that this is a very unpopular deal," he said.
Pittsburgh-based U.S. Steel, the nation's biggest steel maker, agreed Wednesday to buy Dallas-based Texas Oil & Gas in a stock swap that also would involve the assumption of the gas company's estimated $705 million debt load.
Under the stock-exchange proposal, Texas Oil & Gas shareholders would receive 0.6333 share of U.S. Steel stock for each of their common shares. The natural gas producer says it has approximately 210 million shares outstanding. According to analysts, the asset value of those shares is $17.42. Many shareholders had expected to receive a premium for their shares in the event of a merger because of the company's good earnings record over the past 28 years.
The stock exchange would be worth about $3.6 billion. Adding the $705 million in Texas Oil & Gas debt would boost to $4.3 billion the cost of the deal to U.S. Steel.
The problem is that the stock exchange produces a price at least $1.6 billion below the amount that Texas Oil & Gas shareholders thought they should receive for their company, Olson said. Based on yesterday's price of $27.37 1/2 a share for U.S. Steel's stock, Texas Oil & Gas shareholders would receive $17.34 for each share of their company's stock. Texas Oil & Gas stock closed at $16.62 1/2 yesterday.
"My impression is that" Texas Oil & Gas officials "did sell the company 15 percent to 20 percent more cheaply than they should have," Olson said.
However, some other analysts speculated that Texas Oil & Gas, one of the nation's most profitable natural gas explorers, may have been overvalued in the first place.
Robert E. Phaneuf of Kidder, Peabody & Co. Inc. noted that, before the merger announcement, various analysts had placed Texas Oil & Gas' asset value at anywhere from $17 to $23 a share. Texas Oil & Gas shares closed at $19.37 1/2 the day before the first announcement of talks between the two companies.
Phaneuf said he believes that reaction to the proposed merger would vary "according to where you were" in assessing the company's asset value.