Wednesday, November 3, 2010

A Few More Points about EXCO...and Then I'll Stop

In my earlier discussion of the potential EXCO management-led buyout, I neglected to mention a few important points noted by the Wall Street Journal:
  1. Management now owns 15% of the company - that's big because they likely will roll their equity into the transaction, limiting the equity cash that needs to be raised.  It also is a possible impediment against outside bidders.  Nobody wants to bid against management.  It might also keep a lid on the offer price of $20.50 per share.
  2. CEO Douglas Miller took EXCO private in 2003 in a similar transaction.  It reemerged three years later as a public company.  Sensing a trend?
  3. T. Boone Pickens, who is being courted by Mr. Miller to partner in the transaction, was a partner in the earlier transaction and owned 13% of the company when taken private the first time.  He still owns a big chunk of EXCO stock.  Second verse, same as the first.

But the question most people, especially those with EXCO leases, will ask is, "so how does this impact me?"  Hard to say right now.  I think going private will help EXCO's focus on its existing leases.  Other companies are distracted by the "rush to liquids" to please the stock market, but a private EXCO won't be forced by outside forces to follow that path. I think the company is going to stick to its knitting to prove and expand its reserves to position itself to go public again when natural gas prices recover.  I don't think EXCO will go hog wild in developing its existing leases, as it needs to be able to show growth post-IPO.

I do think the private EXCO will be active in acquisitions of land and other companies.  The stock market might not appreciate it right now, but buying assets at a depressed commodity price will create value down the line.

The trap that many leverage buyout companies face is too much debt.  First, paying too much to buy the company on the front end generates too much debt.  But I doubt management will get into a bidding war, especially with itself (Miller said as much).  Second, with management in control of the process it is doubtful you will see private equity silliness like raising debt to pay fat dividends to the investors.  There will, however, be debt that will have to be serviced, which will require strong, steady cash flow.  It's something of a balancing act, especially if gas prices stay low and acquisitions are on the agenda.

The big takeaway for me is that management owns a big chunk of the company and has taken the company down this path before. I don't expect to see any competing bids and I doubt the offer price will increase much, if at all.

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