UpdateUS Anadarko ready to fight Tronox opinion that may cost it $14.2bn

13 December 2013 20:49  [Source: ICIS news]

US Anadarko ready to fight Tronox opinion that may cost it $14.2bn(adds paragraphs 16-57)

HOUSTON (ICIS)--Anadarko plans to pursue every avenue available to the company once a judgement is issued in the Tronox litigation, which could cost the company up to $14.2bn (€10.4bn), the US-based energy producer said late on Thursday.

US Bankruptcy Judge Allan Gropper issued an opinion in the case earlier that day, finding that Anadarko's subsidiary Kerr-McGee was liable for fraudulent transfers in connection to the 2005 spin-off of Tronox, a titanium dioxide (TiO2) producer. Before the spin-off, Tronox was part of Kerr-McGee.

Tronox had alleged that Kerr-McGee had transferred valuable oil-and-gas assets out of the company while burdening it with massive environmental liabilities.

Tronox alleged that the strategy was part of a scheme to make Kerr-McGee an attractive acquisition target. Within months of the Tronox spin-off, Anadarko acquired Kerr-McGee for $18bn.

From its beginnings as a standalone company, Tronox alleged that it struggled under the weight of the environmental liabilities it inherited from Kerr-McGee. Tronox alleged it was insolvent from day one and was doomed to fail.

In January 2009, Tronox filed for bankruptcy protection under Chapter 11. It sued Kerr-McGee in May 2009.

Trusts made up of Tronox creditors ultimately took over the litigation, which allowed the pigment producer to emerge from bankruptcy protection in 2011. Because of this arrangement, Tronox will receive no direct benefit from the reward.

Instead, any reward will go to the trusts, which represent the interests of environmental regulators and individuals with claims alleging damages from the polluted sites.

Tronox, however, will stand to benefit through tax deductions that are connected to the trusts, the company said in a statement. The size of these deductions will be determined by how much money the trusts spend to clean up the polluted sites and to compensate people who suffered damages from these sites.

Tronox estimates that these tax benefits could total hundreds of millions of dollars annually and that these benefits could last for decades.

The next step in the litigation is for the judge to determine the size of the reward and issue a final judgement.

One method of calculating the damages would reward the Tronox trusts $5.15bn, Anadarko said. Another method would reward the trusts $14.17bn. Attorney fees would then be added to the sums.

The two sides now have 60 days to file more briefs, Anadarko said. The court would then issue a judgement, which would be subject to appeal.

"Given the significant factual evidence supporting our position, we vehemently disagree with the judge's memorandum of opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgement including damages has been rendered," said Anadarko CEO Al Walker in a news release.

Anadarko's stock plunged following the judge's opinion. It was trading at $77.15 late Friday morning, down 7.8%. Tronox stock traded at $22.57, up 6.6%.

Tronox's claims

According to Tronox, its path to bankruptcy began more than a decade ago during the merger and acquisition (M&A) boom among oil and gas.

This boom saw Exxon combine with Mobil, BP combine with Amoco and Chevron combine with Texaco.

But Kerr-McGee was left out, the lawsuit alleged. The company was saddled with 75 years' worth of clean-up costs from businesses it had long abandoned. These included wood treatment, uranium mining and fuel retailing.

Kerr-McGee's liabilities were keeping prospective buyers away from acquiring the company, the Tronox lawsuit alleged. To become an attractive acquisition target, Kerr-McGee would have to find a way to separate these liabilities from its oil and natural gas assets.

The company chose to create a new business, to which it transferred the assets, the lawsuit alleged.

What remained of the old business were the TiO2 segment and the liabilities. These were spun off to create Tronox.

Soon after the spin-off, Kerr-McGee was acquired by Anadarko in 2006.

The lawsuit alleged that Tronox never received a fair value for all of the oil and gas assets that were transferred to the new company.

At the same time, Tronox was saddled with environmental liabilities, many of which had nothing to do with TiO2 production, the lawsuit said. Tronox inherited other costs as well, including retiree obligations and debt imposed on it by Kerr-McGee, the lawsuit alleged.

These costs drained Tronox's earnings, the lawsuit said. By 2007, the legacy expenditures represented about 95% of Tronox's earnings before interest, tax, depreciation and amortisation (EBITDA), the lawsuit said.

Because of the massive liabilities, Tronox was questioning its survival in less than six months after its spin-off, the lawsuit alleged. A cost-cutting programme went as far as cancelling subscriptions to The Wall Street Journal and eliminating free coffee to office employees.

Within 18 months after the spin-off, the company was meeting with restructuring professionals, the lawsuit said. In all, Tronox had just one profitable quarter before filing for bankruptcy protection.

The lawsuit conceded that Tronox faced economic and market challenges after the spin-off. However, it alleged that the legacy liabilities caused Tronox to file for bankruptcy protection.

Anadarko's response

Anadarko countered that the Tronox spin-off was never part of a scheme for Kerr-McGee to avoid paying its environmental costs.

The transfer of oil and gas assets was done to simplify Kerr-McGee's corporate structure, Anadarko said. At the time, Kerr-McGee had oil and gas assets spread across several disparate business units, the result of numerous acquisitions, Anadarko said.

Regarding the spin-off, it was a reasonable strategy to increase as much as possible the value of both the exploration and production (E&P) business and the chemical business, Anadarko said.

At the time, E&P analysts who followed Kerr-McGee did not understand how to properly value the chemical business, Anadarko said. As a result, Kerr-McGee believed its stock was trading at a discount. Consequently, the sum of Kerr-McGee was worth less than its parts.

To remove this discount, Kerr-McGee considered several options, including a divestment of the chemical business, Anadarko said. Another option included Kerr-McGee maintaining a stake in the chemical business, since the company was optimistic about its prospects.

"If severing the legacy liabilities was a primary goal of the deal, as plaintiffs allege, Kerr-McGee would never have considered strategic alternatives that left it potentially exposed to those liabilities," Anadarko said.

There were other legitimate reasons for divesting the chemical business, Anadarko said. Earlier in Kerr-McGee's history, the chemical business provided a counter-cyclical balance to the company's E&P operations.

The E&P operations had since grown substantially, and the chemical business was no longer big enough to balance them out, Anadarko said.

Moreover, Kerr-McGee had a direct interest in making sure that Tronox would succeed − since it was spinning off Tronox to its own shareholders, Anadarko said.

When one considers the information available at the time of the spin-off, Tronox was not only solvent but also was a good investment, Anadarko said.

Kerr-McGee was not alone in its confidence for Tronox, Anadarko said. It offered the chemical business for sale and thus opened up the company to exhaustive diligence from private investors.

This resulted in an offer worth $1.3bn by Apollo, which Anadarko described as "one of the most sophisticated investors in the world".

More review came from the companies involved in Tronox's initial public offering (IPO), and they were well aware of the legacy liabilities, Anadarko said.

During the IPO process, Tronox released reports that went into much detail about its liabilities, including facts about specific environmental sites, Anadarko said.

With this information in hand, investors assessed Tronox's enterprise value at more than $1bn, Anadarko said. "These were real people placing real money on the table based on the facts that existed at the time," Anadarko said.

After the spin-off, Tronox was free to discuss its operations, Anadarko said. However, Tronox never told investors that it was insolvent, inadequately capitalised or doomed to fail.

In fact, the company's management continued to express optimism about the company's prospects into 2008, and executives bought additional shares in the company after the IPO, Anadarko said.

Tronox was never doomed to fail, Anadarko said. In fact, it prospered after its spin-off, and its bankruptcy was the result of the worst global downturn since the Great Depression, Anadarko said.

"And when those business headwinds came, Tronox was open and candid with investors about the challenges it faced - and never once mentioned the legacy liabilities as among them," Anadarko said. "Unprecedented and unforeseen industry and economic conditions, not the legacy liabilities, were the cause of Tronox’s demise."

Anadarko has accused the plaintiffs of building a case on the testimony of after-the-fact experts.

Judge's opinion

The subsequent trial took place a year ago, consuming 34 days and involving 28 witnesses.

In the end, though, the judge's opinion favoured the Tronox trusts.

Kerr-McGee did not fairly compensate Tronox when it transferred out the oil and gas assets, Judge Gropper wrote in his opinion. Tronox was left insolvent and undercapitalised.

Moreover, Kerr-McGee transferred out the oil and gas assets with the intent to hinder and delay any Tronox creditors, Gropper said. In fact, "Substantially all of the assets of Kerr-McGee were placed out of the reach of the legacy liability creditors."

Regarding the legacy liabilities, Anadarko never gave a legitimate business reason why they were all imposed onto Tronox, Groper said.

However, Groper did find a reason in the record. Kerr-McGee wanted to separate its oil and gas assets from the environmental liabilities to make itself an attractive M&A target. Kerr-McGee pursued this strategy through a spin-off, he Gropper said.

A sale was never seriously considered, despite the offer from Apollo Group, Gropper said. That offer contained several open items and terms that Kerr-McGee had rejected earlier. It is unclear whether the two sides would have ever come to an agreement about the sale.

Following the spin-off, Gropper noted the financial struggles of Tronox as it struggled to operate in a lacklustre TiO2 market under the weight of the legacy liabilities.

He said that Anadarko must pay for the damages, although not the $19bn sum initially requested by the Tronox trusts.

($1 = €0.73)

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By: Al Greenwood
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