UPR makes $4.2 billion offer for Pennzoil

Union Pacific Resources Group Inc. (UPR), Fort Worth, has offered to acquire Pennzoil Inc., Houston, in a cash and stock deal valued at $4.2 billion.

UPR's offer breaks out as $2.1 billion in cash and $2.1 billion in stock. UPR also would assume $2.2 billion of Pennzoil's debt and obligations.

UPR is offering $84/share for all of the outstanding shares of Pennzoil in a two-step cash and stock transaction that UPR said represents a 41% premium over Pennzoil's closing price of $59.625/share on June 20, 1997, a 56% premium over the closing price 30 days prior to that, and a 56% premium above the average closing price during the past 12 months.

"We believe that the merger of UPR and Pennzoil will create the premier independent exploration and production company in the U.S.," said Jack L. Messman, UPR chairman and CEO.

Pennzoil said its board will review the unsolicited tender offer and disclose its response by July 7, 1997.

"In the meantime," the company said, "Pennzoil urges all its stockholders to defer any action on the tender offer until there has been a public announcement of the board's response."

Meanwhile, UPR has filed suit in three jurisdictions relating to the offer.

Terms of the offer

The cash tender offer commenced June 23.

UPR will use bank borrowings for the cash portion of the offer, and stock will be issued to cover the stock portion of the deal.

In the first step, UPR is offering through a wholly owned subsidiary, Resources Newco Inc., to acquire 50.1% of Pennzoil's common shares at $84/share.

The second step calls for Pennzoil and the UPR unit to merge in a transaction in which each remaining Pennzoil share will be exchanged for a determined number of UPR shares within a pricing collar of $25-30. That will be arrived at by dividing the $84 UPR offering price by the average of the closing prices of UPR common stock for the 20 consecutive trading days ending 5 days prior to the meeting of Pennzoil shareholders called for the purpose of voting on the proposed merger.

According to UPR, in the event that the UPR exchange ratio is less than $25, or greater than $30, the ratio will be fixed at 3.36 shares, or 2.8 shares, respectively.

Exchange of shares is expected to be tax-free for Pennzoil shareholders.

Messman said, "We are confident that UPR will create growth and value well beyond what Pennzoil can achieve on its own."

A combined company, he said, "will have the resources to pursue significant new E&P opportunities both domestically and internationally, as well as to fund the strategic growth of the downstream businesses."

Court actions

UPR said it filed suit to ensure that Pennzoil's board does not prevent Pennzoil shareholders from "realizing the substantial premium value" that UPR is offering for the company.

Separate actions have been filed in Delaware, Texas, and Louisiana:

In Delaware Chancery Court, Wilmington, UPR seeks a judgment directing Pennzoil's board to lift its anti-takeover defenses.
In U.S. District Court for the Northern District of Texas, Fort Worth, UPR seeks a declaratory judgment that UPR's offer documents, being distributed to Pennzoil shareholders, comply fully with all applicable requirements of law.
In U.S. District Court for the Middle District of Louisiana, Baton Rouge, UPR seeks to prevent any attempt to apply that state's anti-takeover laws to UPR's offer for Pennzoil, in a pleading that alleges Louisiana's anti-takeover laws violate the U.S. Constitution.

Background

UPR said it has been seeking to discuss the possible deal for more than 4 months but has been "repeatedly rebuffed" by Pennzoil Chairman and CEO James L. Pate.

In a June 23, 1997, letter to Pate, UPR's Messman said, "Your continued refusal to discuss the rationale or valuation of a transaction has left us with no choice but to present our offer directly to Pennzoil shareholders. While we are still prepared to discuss a friendly transaction, the UPR board of directors strongly supports pursuing a business combination now."

According to Messman, Pennzoil's Pate first raised the issue of a possible merger with UPR in 1995.

"Your Jan. 25, 1995, letter was correct in pointing out that Pennzoil 'provided the best possible fit' with UPR," Messman said.

But Messman said that, in a letter from Pate to him dated May 8, 1997, Pate indicated that Pennzoil "faced more difficulties in 1995 than it does now and that therefore a merger somehow no longer makes sense."

In response, a Pennzoil official said, "We thought we saw attraction there 2 years ago; they (UPR) didn't want to do it.

"So, we went on our way to restructure this company and create a lot of initiatives that, we think, will add substantially to shareholder value. Things have changed."

Pennzoil said UPR unsuccessfully made an $80/share offer "that came in on June 10." It was rejected by Penn- zoil's board of directors, and Messman was notified in a letter dated June 20, according to Pennzoil.

Pennzoil overview

Pennzoil is involved in oil and gas exploration and production, refining, motor oil and consumer products marketing, and oil change/lubrication operations.

In 1996, the company said its Pennzoil motor oil was the top-selling brand in the U.S. for the 11th consecutive year with a market share of more than 21%.

At yearend 1996, it operated 1,380 Jiffy Lube stores in the U.S. and planned to open an additional 150 during 1997. Of the total, franchisees operate 855 and Jiffy Lube the remainder.

In addition to its U.S. E&P operations onshore and in the Gulf of Mexico, Pennzoil is involved in operations in Canada, Australia, Azerbaijan, Egypt, and Qatar.

During 1992-96, Pennzoil carried out a North American asset high-grading program that ended in 1996. It resulted in the sale of about 620 oil and gas fields. The total included 20 sold in 1996 that were classed as non-core properties and located mainly in the Gulf of Mexico.

At yearend 1996, Pennzoil had audited reserves of 187 million bbl of oil, including 165 million bbl in the U.S., and 1.277 tcf of natural gas, of which 1.187 tcf was in the U.S.

Pennzoil had interests in 6,637 oil wells and 1,814 gas wells in the U.S. at yearend 1996, and it had interests in another 51 wells outside the U.S., including 46 gas wells.

Pennzoil's production at yearend 1996 was about 56,400 b/d of oil, condensate, and natural gas liquids in the U.S. and about 3,200 b/d outside the U.S.

Its yearend gas production was 552.4 MMcfd in the U.S. and 36.8 MMcfd outside the U.S.

UPR

UPR was founded in 1917 in Enid, Okla.

It was a wholly owned unit of Union Pacific Corp. until 1995, when 17% of the company was sold in an initial public offering. The remainder was distributed to shareholders in October 1996.

The company has about 1,700 employees. About two-thirds are located in its Fort Worth headquarters.

For 1996, UPR reported a 35% increase in net income to $321 million on $1.83 billion in revenues.

The company is organized into six business units-Austin Chalk, Plains/ Canada, Gulf Onshore/Offshore, East/ South Texas, West Texas, and Land Grant (Wyoming).

Its yearend 1996 proved reserves were about 2.38 tcf of natural gas, 107.5 million bbl of NGL, and 80.6 million bbl of oil and condensate. On a gas-equivalent basis, its reserves totaled about 3.5 tcfe at yearend 1996.

At yearend, UPR had interests in more than 5,000 productive gas wells and almost 2,800 oil wells.