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Portfolio > Alternative Investments > Hedge Funds

Jana Makes Houston Exploration a $1.8 Billion Offer

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NEW YORK (–After a series of overtures to the management of Houston Exploration Co. and a vote-withhold campaign before the annual meeting in April, the hedge fund Jana Partners has decided to go ahead and offer to buy the Texas-based oil and gas company for $62 per share, cash.

The offer from Jana, a $5 billion hedge fund that currently controls 12.3% of HEC’s equity, values the company at approximately $1.8 billion.

“We believe that there is still tremendous value in Houston Exploration, but that it will continue to be destroyed as long as the Company remains in the hands of those who show far less interest in maximizing this value than they do in transferring it to the company’s management,” wrote Jana Partners Managing Partner Barry Rosenstein in the offer letter addressed to the HEC board of directors.

Jana’s June 12 offer followed a list of complaints that provide a roadmap of the increasingly contentious relationship between HEC and Jana, one of its largest shareholders, since the hedge fund announced its position in the company early this year.

In April, Jana submitted an analysis to the board recommending a $650 million stock repurchase following HEC’s sale of offshore Gulf of Mexico assets to refocus on onshore natural gas production, a new strategic direction for the company. Jana’s analysis earned no “substantive response” from the board, according to the hedge fund.

Jana then advanced a vote-withhold campaign ahead of the company’s April 28 annual meeting, which resulted in 30% of all votes behind withheld–a figure Jana said was artificially low, because the hedge fund had at that time not yet redeemed all of its options.

Jana also has raised the issue of executive compensation, calling upon the HEC board to justify what it described as a 500% increase in compensation for Chief Executive William Hargett between 2003 and 2005, while the other four top executives at the company saw a combined increase of 259% and the company’s stock has “vastly underperformed” in comparison to its peers, according to the fund.

On June 1 Jana demanded, citing Delaware law, that HEC provide books and records relating to acquisitions, executive compensation, executive expenses and the company’s dealings with joint venture partners and former executives; Jana argued that these documents could shed light on “potential breaches of fiduciary duty and corporate waste by the Board.”

The June 12 offer letter also suggested that HEC had already refused potentially beneficial acquisition offers.

“Finally, it appears that the Board may have in the past rebuffed private inquiries regarding a potential acquisition of the Company at a significant premium, in which case the Board has not only failed to generate maximum value for shareholders, it has stood in the way of shareholders potentially realizing this value through a sale, thus further perpetuating the cycle of value destruction at Houston Exploration,” Mr. Rosenstein wrote.

Although Mr. Rosenstein noted in the letter that the necessary due diligence and documentation for the offer could be completed quickly and the firm is able to fully finance the deal, his tone was not optimistic. “Essentially, the harder we press the Board to deliver maximum value for shareholders, the harder it seems the Board digs in its heels in resistance,” Mr. Rosenstein wrote.

For its part, HEC seemed in no hurry to address Jana’s offer. In a brief statement the company advised shareholders to take no immediate action, saying that consultations would be made with HEC’s financial and legal advisers and that the board would meet “in due course” to discuss the offer.

On news of the offer, HEC shares (THX) rose to a high of $59.81 in trading June 12 before closing at $57.97. Tuesday [June 13] it slipped to $56.90.

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Contact Bob Keane with questions or comments at [email protected].


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