Monday, November 1, 2010

EXCO Receives Buyout Offer from CEO

When I predicted last week that we would see some buyouts of independent natural gas focused E&P companies last week, I didn't think it would happen this fast, but... EXCO Resources announced today that it has received a buyout offer from its Chairman and CEO Douglas Miller.  Miller has had discussions with Oak Tree Capital Management, Ares Management and T. Boone Pickens, all significant current investors in EXCO, about partnering in Miller's offer of $20.50 per share for EXCO.  The company closed at $14.83 on Friday.  It has traded as high as $22.52 this year, back in January.

This is a very interesting move.  As I stated last week, it is a mixed blessing for shareholders.  The offer represents a 38% premium, but does it really express a true valuation for the company?  One of the first rules of marketing is that the only valid definition of "price" is amount the market is willing to pay for a particular good.  The stock market is woefully short-sighted (even more so these days now that most trading activity is flash trading that pays little consideration to a company's true long-term value) and the market tends to value a company based on short-term metrics.

If consummated, this would be a classic management-led buyout.  Management knows every square inch of the company and knows the company has greater value than its current market price.  The stock price is low because commodity prices make the stock market more pessimistic about the value of EXCO.  What better time to take the company private?  It would be backed by deep-pocketed investment firms with a longer-term view of the company's value.  As a private company, EXCO can "stick to its knitting" and wait out the depressed commodity prices.  Most likely, its new financial sponsors will take the company public again when prices improve.  Management wins (potentially big), the investment firms win and the public... well, the public has to sell the shares at the price the investors and the board agree upon and then they are out.  The next chance the investors have is when and if the company has another IPO down the road.

The offer is hardly a done deal.  The usual machinations are starting to take place.  The EXCO board, which has a fiduciary responsibility to its shareholders, has formed a special committee to evaluate the offer.  They are required to fairly evaluate the offer and likely will be open to other offers (they'd better be!).  Already a handful of securities plaintiff lawyers have taken it upon themselves to "investigate the transaction for shareholders." Last week I compared LBO to vultures, but the real vultures are these securities plaintiff lawyers. But they are all part of the deal ecosystem and theoretically they help shareholders get a better deal.

My guess is the offer price will go up a little bit, but if the company does agree to go private it will be this deal that takes them there.  Any new offer would be competing against incumbent management.  It will be interesting to see if investors start to bid up other potential buyout candidates.  Deals like this could make for an interesting year.

No comments: