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Anadarko Looking Vulnerable to Possible Acquisition Bid

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Anadarko Petroleum’s (APC) market capitalization has dropped from $49.2 billion on October 29 to $40.10 billion as of market close on December 18, as the stock, which is currently trading below $80, erased all year-to-date gains and dipped 24.5% below its price at the start of the year.

The drop in share price can be partly attributed to a lawsuit over environmental and legal liabilities related to its 2006 acquisition of Kerr-McGee Corp. US Bankruptcy Judge Allan L. Gropper gave a verdict last week saying the company and its Kerr-McGee unit could face a fine of up to slightly more than $14 billion. The decision, announced last week, drove share prices down 11% as the market reacted.

The significant drop in the company’s market cap makes it vulnerable target for a possible acquisition bid.

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Assuming that the pace of mergers and acquisitions in the energy sector – which is at the lowest level since 2004 – will pick up in 2014, Anadarko is likely to be a primary target because of the drop in its share price. But given the sheer size of the company (it has an enterprise value of $51 billion), only supermajors may be in a financial position to pull off such an acquisition bid. The only recent example of a deal of this size was the December 2009 takeover of Houston-based XTO Energy by Exxon Mobil (XOM) in an all-stock deal worth $41 billion.

Amy Myers Jaffe, executive director of energy and sustainability at the University of California, recently told Bloomberg: “Anadarko is a company that’s been discussed on Wall Street for a long time as a company that a larger supermajor could take over.” Representatives for Exxon Mobil, Chevron (CVX), Shell (RDS.A) and BP Plc. (BP) have declined to comment on whether they are interested in buying it out, though.

Any potential merger with Anadarko has its pros and cons. On the plus side, Anadarko’s presence in countries like Kenya and Mozambique has strategic importance because of Africa’s strong GDP growth rates. With China losing its edge its competitive edge in labor-intensive manufacturing, African countries seem poised to take over.

However, any potential suitor would have to consider the excess baggage Anadarko brings with it. Anadarko’s $13 billion debt and the settlement costs of the recent fine, which can range between $5-14 billion, are alarming signs. The company is in no position to settle the liabilities, and may either have to sell assets or resort to debt financing. And raising more debt will not be easy, since the company is already highly leveraged. The company has the second highest debt-to-equity ratio among its competitors.

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Standard & Poor’s said yesterday it may cut Anadarko’s credit rating to junk status if the company ends up having to pay more than $9 billion for the settlement and doesn’t do so by selling its assets.

The company is currently rated at the lowest investment grade level of BBB-.

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