A Berkshire Deal for Occidental Chemicals Unit Could Bring a Surprise

Occidental Petroleum’s stock price, shown on the floor of the New York Stock Exchange in late July. (Michael Nagle/Bloomberg)

While Berkshire Hathaway has more than $300 billion in cash, it may not make sense to tap it for a potential $10 billion purchase of Occidental Petroleum’s chemicals business. Using Berkshire’s Occidental preferred stock as a currency for most of the price could be more appealing to the oil-and-gas company.

It could make a deal with Berkshire a better option than a sale to other potential buyers.

If Berkshire handed over the preferred, Occidental would benefit because the transaction would be treated as a tax-free exchange, according to New York tax expert Robert Willens. Occidental wouldn’t have to pay taxes on the sale of the chemical business, which would be characterized as a split-off for tax purposes.

“A split-off would be beneficial for OXY. It would not have to recognize the gain that has accrued in the subsidiary’s stock, which I’m guessing would be quite substantial,” Willens wrote in an email to Barron’s. Barron’s isn’t aware of any disclosure by Occidental of the cost basis of the chemicals business and the company didn’t immediately respond to a request for comment.

A sale for cash likely would trigger a tax bill.

Berkshire holds $8.5 billion of Occidental preferred, paying an 8% annual dividend, that it bought in 2019.

Berkshire could also use part of its 27% common equity stake in Occidental, now worth around $12 billion, to pay for the chemical business, but that is complicated by the fact that Berkshire has held that stake for less than five years, which makes use of the tax-free treatment more difficult. Berkshire could mix Occidental preferred and equity in a tax-free deal if the preferred is at least 50% of the consideration, Willens says.

Berkshire likely doesn’t want to part with the Occidental stock, now trading around $47, given that CEO Warren Buffett likes the energy company and its CEO Vicki Hollub. Berkshire also is likely sitting on a loss. Barron’s estimates its cost basis is in the low 50s. Occidental stock was up 0.3% to $47.39 on Wednesday. Berkshire’s Class A shares were down 1.1% at $746,065.

The Wall Street Journal reported Tuesday that Occidental is in talks to sell its chemicals business to Berkshire for around $10 billion and that a deal could be announced within days. Neither company responded to a request for comment on the report.

The general assumption is that if a deal is reached, Berkshire would pay for the chemicals business in cash since CEO Warren Buffett likes to pay cash for deals and Berkshire is eager to put some of its vast holdings to work.

But if Berkshire swapped the $8.5 billion of preferred for the chemicals business and topped it off with $1.5 billion in cash, it would have several benefits for Occidental.

Not only would that be tax efficient for Occidental, as Willens says, it would also relieve the company of the annual dividend of nearly $700 million it pays on the preferred. It also would help neutralize any criticism that Occidental did a sweetheart deal with its largest shareholder.

As it stands, a $10 billion price tag for the chemical business looks appealing to Berkshire, or another buyer. That price amounts to about eight times the earnings before interest, taxes, depreciation, and amortization expected for 2025—a reasonable valuation considering that earnings are now depressed across the chemicals industry.

The negative in using the preferred as a currency is that Occidental, which is seeking to pay down debt of around $24 billion, would get little debt reduction from such a deal. But the preferred is debtlike, carries a high dividend yield, and likely will need to be paid off in a few years.

As it stands, Occidental probably would redeem the Berkshire preferred stock in 2029, when it can do so at a 5% premium to face value.

All that is a sign that Berkshire has a way to buy the chemicals business that is favorable to Occidental and that other potential purchasers can’t match.

Write to Andrew Bary at andrew.bary@barrons.com