Panel rejects Leucadia’s bid for Plains Resources

The Leucadia group failed to improve its March 19 proposal, Plains’ special review committee said; it had expected a ‘superior proposal’

Ray Tyson

Petroleum News Houston Correspondent

A special committee formed to review offers for independent Plains Resources has rejected a bid from an investment group led by Leucadia National and Pershing Square, appearing to strengthen the hand of a rival investment group led by Microsoft co-founder and billionaire Paul Allen.

Plains already has entered into a merger agreement with the Vulcan Group, a subsidiary of Allen’s Vulcan Capital, to acquire Plains for $16.75 per share in cash, or roughly $400 million based on the company’s market value. Vulcan’s initial bid of $14.25 per share was rejected by Plains’ board of directors.

In addition to Allen, the Vulcan takeover team includes Plains Chairman James Flores and Chief Executive Officer John Raymond, the son of ExxonMobil Chairman Lee Raymond. The deal would require shareholder approval.

Leucadia’s offer for Plains, considered after the board accepted Vulcan’s offer, proposed that Plains stockholders receive a combination of cash, preferred stock, and debt securities that would be issued by Plains.

According to Securities and Exchange Commission filings, Pershing Square, which owns 5.33 percent of Plains’ general partnership, proposed a $75 million cash offer, which would pay Plains shareholders $3 per share, with the balance in new, unregistered securities to be issued by a new holding company. Those securities would be valued between $17 and $17.60 a share, according to SEC documents.

Committee expected “superior proposal”

The committee said it was concerned that the tax and leverage issues raised in the Leucadia offer would adversely impact Plains’ ability to pay the interest and distributions on the proposed debt and preferred stock.

Moreover, the committee expressed concern the small amount of cash offered in Leucadia’s proposal would be insufficient for most Plains shareholders to pay taxes on their gains resulting from the transaction and “could create immediate negative selling pressure on the proposed new debt and preferred securities.”

Also, the deal would create “phantom” taxable income in excess of interest payable to holders of the proposed debt securities, the committee said.

The committee said that despite conceding the validity of the tax issues, Leucadia sent a letter to the committee “indicating an unwillingness to improve its offer, and did not offer any alternative solutions to the issues raised by the special committee.”

Leucadia cancelled proposed meeting

“After accepting the invitation and scheduling the meeting, Leucadia cancelled the proposed meeting, declined to provide all of the requested information, declined to execute a confidentiality agreement and stated that it would not modify the March 19 proposal,” the committee said.

Leucadia did not respond to the committee’s allegations, nor indicate its next move at Petroleum News’ deadline.

The main objective for both the Vulcan and the Leucadia-Pershing groups appears to be fast-growing Plains All American Pipeline. It so happens that Plains Resources, a small exploration and production independent, owns 44 percent of the general partnership of Plains All American, a publicly traded master limited partnership, and a 24 percent aggregate ownership interest in the pipeline company.

In early April, Plains All American announced the $330-million acquisition of Houston-based Link Energy, a transaction that essentially doubled the amount of pipeline miles held by Plains All American in the United States and Canada.

Allen’s Vulcan Capital committed $40 million to the Link deal. It marked Allen’s first direct venture into the midstream energy sector, preceded by Vulcan’s still pending takeover bid for Plains Resources.