US Tronox spin off riddled with fraud - lawsuit

13 May 2009 19:08  [Source: ICIS news]

HOUSTON (ICIS news)--Bankrupt Tronox sued Anadarko Petroleum and former parent Kerr-McGee, accusing them of saddling it with more than 70 years worth of environmental liabilities while misleading investors and creditors about the magnitude of those costs, a development for which Anadarko had no immediate comment on Wednesday.

Anadarko was sued because it acquired Kerr-McGee in 2006, the same year that Kerr-McGee spun off Tronox.

In the lawsuit, Tronox describes what it called a fraudulent scheme, under which Kerr-McGee dumped its liabilities into its former chemical subsidiary. Once freed from those liabilities, Kerr-McGee sold itself for a lucrative profit.

Since its founding in 1929, Kerr-McGee had accumulated substantial environmental, tort and retirement liabilities, estimated at $400m-900m (€292m-657m), Tronox said. Over the years, Kerr-McGee had treated wood products; produced rocket fuel; refined and sold petroleum products; and mined, milled and processed nuclear materials.

Already, US regulators wanted $178.8m for the clean up of Kerr-McGee's former wood-treatment plant in Manville, New Jersey, Tronox said.

Such environmental costs were frustrating Kerr-McGee's plans to sell itself in a merger-and-acquisition (M&A) deal, Tronox said.

To make itself more attractive, Kerr-McGee adopted a strategy, under which it would protect its valuable oil and gas assets while transferring its legacy liabilities into its chemical business, Tronox said.

Many of those liabilities had nothing to do with its chemical business, which primarily made titanium dioxide (TiO2), Tronox said. The TiO2 subsidiary was now liable for former petroleum terminals, offshore drilling operations, gasoline stations, wood-treatment sites and agrochemical operations, Tronox said.

At first, the liabilities overwhelmed Kerr-McGee's chemical business, Tronox said. To address the problem, Kerr-McGee rushed through a $400m TiO2 buying spree, paying too much for pigment plants and ignoring any potential environmental issues attached to those acquisitions, Tronox said.

By 2005, Kerr-McGee was ready to shed off its chemical business, together with its legacy liabilities, Tronox said. It presented bidders with what Tronox called inflated projections and understated liabilities.

The sales pitch did not work, Tronox said. One potential bidder called the pitch "criminal", Tronox said. Another lowered its initial bid by 75%.

With the sales strategy failing, Kerr-McGee decided to spin off the subsidiary, Tronox said. Kerr-McGee could then dictate the terms of the deal; avoid any third-party due diligence; and eliminate any standard representations and warranties regarding its environmental liabilities.

Before the spin off, Kerr-McGee stripped away cash from the company while assigning it debt, Tronox said. Kerr-McGee then transferred high-level executives out of the subsidiary's pension fund - since a future bankruptcy could jeopardise their retirements.

Kerr-McGee completed the spin off on 31 March 2006, Tronox said. Less than three months later, Andarko made a $18bn to buy Kerr-McGee.

The deal closed on 10 August 2006, and Kerr-McGee management enjoyed a windfall, Tronox said. The CEO pocketed more than $200m, and the chief financial officer got $20m.

Meanwhile, the newly formed Tronox did not have a chance to survive while inheriting massive liabilities with little capital, the company said.

Following the spin off, Tronox had just one profitable quarter, the result of proceeds from a settlement, the company said.

Earlier this year, Tronox's US operations filed for bankruptcy protection.

"Simply put, Tronox was destined to fail," the company said. "Kerr-McGee knew it."

($1 = €0.73)

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By: Al Greenwood
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