Berkshire Hathaway has supported the Occidental Petroleum's ambitious $ 55 billion bid for competitor Anadarko Petroleum, and pledged to invest $ 10 billion to fund the deal, in a rare move by Warren Buffett in independent slate production.
Berkshire has said that if the acquisition goes through, it will invest $ 10 billion in new Occidental preferred shares that will pay 8 percent dividends, and a subscription right to buy up to 80 million shares in the stock market, about 11 percent of equity.
Mr Buffet's obligation was unexpected because he generally ruled by the companies that led the shale revolution. The deal will make Occidental the third largest US oil company, strengthening its already strong position in the Permian Basin of Texas and New Mexico, the heart of the American shale oil boom.
Vicki Hollub, Occidental's CEO, said in a statement that the company was "thrilled" to get Berkshire's support for its bid. Speculation that Mr. Buffett would be involved rose after the Occidental's corporate jet was discovered in his hometown of Omaha, Nebraska, on Sunday.
"We have long believed that Occidental is uniquely positioned to generate compelling value from Anadarko's highly complementary property portfolio," Hollub said. "We look forward to engaging with Anadarko's board to deliver this superior transaction to our respective shareholders."
Concerns about the finance price, however, drove Occidental's shares down about 2 percent to $ 58.83 in early afternoon trading in New York.
Anadarko is on course to accept the offer from Occidental, which underwent its formerly agreed $ 50bn sale to Chevron. At Tuesday's rates, Occidentals were 50/50 cash and shares worth around $ 74 per Anadarko share, while Chevron was worth just $ 63, with a lower cash component.
On Monday, Anadarko said the board had "unanimously determined" that Occidental's offerings were likely to be considered superior to the Chevron agreement.
But the bid has raised concerns about the effect on the company's loans, both to finance the offer and as a result of taking Anadarko's debt.
If fully debt financed, the deal will cause the merged group to have a net debt of about $ 42 billion, more than three times the cash flow from operations, according to Jason Gammel, an analyst at Jefferies.
Moody's, the reviewing agency, warned last week that it expected to downgrade Occidental from A3 to "a weakly placed investment grade rating" if the acquisition went through.
The 8 percent dividend that Berkshire will receive on the preferred shares looks like expensive financing compared to Occidental's 10-year bonds, which provide approx. 3.4 percent.
The subscription right to purchase shares in Occidental has a strike price of $ 62.50, which means that it would be in the money after only a modest growth in the shares from their level on Tuesday.
Matthew Portillo, analyst at the investment bank Tudor Pickering Holt, said he had been "lukewarm" about the possibility of the Anadarko acquisition, which increased Occidental's revenue and cash flows, even before announcing the funding.
The cost of the preference shares, he warns, "can eat into some of the free cash flow from the transaction."
He added that if Chevron were to return with a bid ordered at about $ 73 per share, it would probably be able to gain control over Anadarko, because it could make a better case for synergies and had a stronger balance.