By Al Greenwood
HOUSTON (ICIS)--Nearly a year after closing arguments had ended, a decision is still pending in a $19bn (€14bn) lawsuit pitting Tronox creditors against Anadarko and the pigment-producer's former corporate parent, Kerr-McGee.
When Kerr-McGee was still independent, Tronox alleged that the oil-and-gas producer created a scheme that would make it an attractive take-over target. Under the scheme, Kerr-McGee would lump its massive environmental liabilities into a spin-off company.
That company was Tronox, which Kerr-McGee had spun off in 2006 as a producer of titanium dioxide (TiO2).
Within months, Anadarko acquired Kerr-McGee for $18bn.
From its beginnings as a stand-alone 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 doomed to fail.
In January 2009, Tronox filed for bankruptcy protection under Chapter 11. Its largest creditors included state and federal environmental regulators.
Under a deal reached with the regulators, Tronox would pay them $270m and be freed from the liabilities. The settlement allowed the company to exit bankruptcy protection in 2011, and its stock is now listed on the New York Stock Exchange (NYSE).
In return, the regulators agreed to take over the lawsuit. If they prevail, they would receive nearly all of the reward, which would go towards cleaning up polluted sites.
Anadarko disputes Tronox's allegations. It said that the 2008-2009 US economic crisis − the worst since the Great Depression − caused the company's bankruptcy. At the time of Tronox's spin-off, Kerr-McGee had every reason to expect that the company would be profitable and successful, Anadarko has said.
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, the company 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 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 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.
Closing arguments in the case were made in December 2012. A decision is still pending.
A twist in litigation
Given the size of the potential damages, it is not surprising that the judge has yet to reach a decision, said Jay Westbrook, a law professor at the University of Texas. Westbrook is not involved in the litigation.
"A judge is going to be very, very careful in either granting or denying damages at that scale," he said.
Plus, the case has generated an incredible amount of paperwork and findings of fact, he said.
The combined post-trial briefs of both sides exceeded 450 pages. The findings of fact, filed at the end of November 2012, exceeded 750.
One aspect of the Tronox litigation represents a twist on what is a common occurrence among corporate bankruptcies.
In many instances, a company operating under bankruptcy protection will reach a settlement similar to the one that Tronox reached with government creditors, Westbrook said. This arrangement, though, is made with other businesses to which the bankrupt firm owes money. Westbrook is unaware of government agencies making these types of settlements.
Westbrook explained the rationale for such settlements. In these cases, the bankrupt company lacks the assets to pay off the creditors. However, the company is a plaintiff in a lawsuit in which it has a chance of winning.
Under the settlement, the creditors take over the lawsuit, Westbrook said. A victory could pay off the debts.
A defeat would mean little, since the creditors had little chance of collecting money from a bankrupt company with few assets, Westbrook said.
In the case of Tronox, Westbrook has not studied the litigation closely, so he does not know whether the government calculated that a settlement was the best way for it to pay for the clean-up costs.
With the caveat of the litigation costs, Westbrook said the regulators may have determined that the settlement was their best option, despite the risk that they could lose the case.
($1 = €0.74)
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