Pennzoil Co. directors yesterday unanimously rejected a proposal by Texaco Inc. to settle an $11.1 billion judgment against Texaco after rumors of a settlement had sent Pennzoil's stock soaring.
In a terse statement issued from its Houston headquarters yesterday evening, Pennzoil said it had "previously and repeatedly advised Texaco that this type of proposal is entirely unacceptable." Neither company would comment on the nature of the proposal or why Pennzoil had turned it down.
The two oil companies have been attempting to reach a settlement since late December, following a jury verdict that ordered Texaco to pay Pennzoil $10.53 billion plus interest for unethically taking control of Getty Oil Co. away from Pennzoil in a 1984 merger.
At mid-afternoon yesterday, the Dow Jones News Service, quoting unnamed sources, said a settlement could be announced in which Texaco would acquire Pennzoil by giving each Pennzoil shareholder 3 1/2 shares of Texaco common stock.
The rumor was reported as Pennzoil's directors were sequestered in a closed board meeting in Houston, apparently to consider a Texaco settlement offer. Texaco's board had met on Monday.
The rumor lifted Pennzoil's stock $19.75 a share yesterday to $83 on the New York and Pacific stock exchanges. Texaco closed at $30.75 a share, down 50 cents, as trading in the two stocks combined totaled more than 3.5 million shares on the New York exchange.
The surge in Pennzoil's stock price, which boosted the value of its 45 million shares by more than $888 million, was a vivid indication that many market traders believed a settlement was close.
But Pennzoil trial attorney Joe Jamail told The Associated Press yesterday the rumored outline of the stock swap settlement was "absolutely false." "The ball continues to be in Texaco's court," Pennzoil Chairman J. Hugh Liedtke said following the four-hour directors' meeting.
Texaco attorney Gibson Gayle said the company will file a motion today asking for a new trial on the breach-of-contract dispute with Pennzoil.
Pennzoil had reached an agreement with the Getty Oil directors two years ago to acquire just under half of Getty's stock -- and with it, access to 1 billion barrels of Getty's oil and natural gas reserves. But before that agreement had been signed, Getty directors agreed to sell the company to Texaco for a higher price.
Pennzoil said the value of those lost reserves was $7.34 billion and a Texas trial judge agreed, adding on $3 billion in punitive damages against Texaco.
Texaco argues that Pennzoil's loss was no more than $500 million and warned that if the jury's judgment were finally upheld, the nation's third-largest oil company would be driven into bankruptcy.
With Texaco stock trading at about $30 a share, the rumored swap would be worth more than $105 a share to Pennzoil's holders. On that basis, a settlement would cost Texaco at least $2.5 billion and perhaps as much as $4 billion, according to investment bankers and Wall Street analysts.
The discepancy involves differences in the estimates of the value of Pennzoil assets that Texaco would be acquiring.
Assuming that Pennzoil stock is worth $60 a share based on the company's underlying value, and Texaco would be paying the equivalent of $100 per share, that means the settlement would cost Texaco about a $40 premium for each of the approximately 50 million shares of Pennzoil, or $2.5 billion, said Bruce Lazier, an oil industry analyst with Prescott Ball & Turbin.
Alan Edgar, an investment banker with Schneider, Bernet & Hickman in Dallas, said he values Pennzoil at closer to $90 a share, as does Pennzoil's management.
"Conceptually, it would be a great way to solve the problem," Edgar said. A stock swap would provide a tax-free gain for Pennzoil shareholders. He values Texaco at $85 a share -- the rumored stock swap price would be worth more than $100 a share to Pennzoil holders, or $15 a share as compensation for the damages awarded by the Texas jury.
"There's got to be some good news for Texaco shareholders in this," Edgar continued. And in his view, it would be an agreement to put Pennzoil chairman Liedtke in charge of the combined Texaco and Pennzoil companies.
"It would be an awfully sweet deal for Pennzoil," Lazier said. "If this is true, Liedtke would become a very significant shareholder of Texaco" following a swap, through the shares he owns and influences indirectly.
The value of Texaco's shares presumably would be diluted by such a merger. However, a deal on those terms still would enable Texaco to continue paying its customary dividend, a vital factor for its shareholders, who -- like Pennzoil's -- would have to approve a stock swap, Lazier said.
A merger of the two companies would boost Texaco's cash flow -- adding $700 million from Pennzoil to Texaco's $3.9 billion last year. The combined cash flow would probably be enough to protect Texaco's dividend and the addition of Pennzoil's assets would improve Texaco's debt-to-asset position, Lazier said.