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Settlement To Bring Changes In Both Companies

December 21, 1987

NEW YORK (AP) _ The shooting may be over, but the work is just beginning for Texaco Inc. and Pennzoil Co.

While Pennzoil faces the daunting challenge of finding the best ways to use a $3 billion windfall, Texaco - gritting its corporate teeth - knows the time has come to make the best of a bad situation.

After nearly four years of feuding and angry litigation, the two companies announced Saturday they had agreed on a plan in which Texaco will pay $3 billion to Pennzoil to drop a $10.3 billion judgment it holds against Texaco.

The judgment resulted from a 1985 jury ruling that Texaco had improperly interfered with a Pennzoil acquisition of part of Getty Oil Co., then bought Getty itself.

In April, Texaco sought protection under federal bankruptcy laws to avoid having to post a bond equal to the judgment while it pursued its appeal.

Besides the $3 billion for Pennzoil, the agreement calls on Texaco to come up with another $2.5 billion, roughly, to pay other debts. If shareholders and the bankruptcy court approve, it could emerge from bankruptcy in early spring.

Wilbur Ross, financial adviser to Texaco’s shareholders committee, said Saturday the company had agreed that the main way of paying the settlement would be through asset sales rather than the sale of common stock.

Pressure to sell more assets - thereby raising the value of its stock - could also come in the form of a hostile takeover attempt, along with calls on the management to quit, some analysts say.

″I think there will be a post-litigation phase during which management will be very vulnerable,″ said Phillip L. Dodge, who tracks oil company stocks for Nomura Securities International Inc.

On Saturday, Texaco president James W. Kinnear confirmed that asset sales are likely.

If the settlement is approved, the company will ″review Texaco’s assets and businesses for the purpose of accepting its restructuring plan, designed to maximize shareholder value,″ he said.

″We will undertake an aggressive, imaginative and exhaustive review of every asset and operation, divest those that won’t contribute to our quest for competitive leadership and ensure that the remaining assets and operations are put up to their best, most efficient and most productive use,″ he said.

One prospect is Texaco’s 78 percent interest in Texaco Canada, Inc., estimated to be worth at least $2.2 billion. It has already drawn the interest of at least two Canadian firms.

In promising to ″maximize shareholder value,″ Kinnear may have been thinking of Carl C. Icahn, a takeover specialist and Texaco’s largest shareholder, with voting power over 12.3 percent of the company’s shares.

Icahn played an active role in pushing for the settlement, leading to speculation - which he denied - that he was considering making a run on the company.

″He’d probably make a run, or get someone else to make a run, or pressure the company to sell more properties,″ Dodge said.

But Richard S. Pzena, an analyst at Sanford C. Bernstein & Co., disagreed. He said he believed Icahn ″is just in for a quick buck.″

Gary E. Hindes, chairman of the Delaware Bay Co. Inc. securities firm, predicted stockholders would attempt to force a complete management change, but suggested the board might counter that with a major buyback which would ″make shareholders happy and Mr. Icahn happy.″

Pennzoil, however, is a different story.

Analysts say Pennzoil could go on a shopping spree that could vastly increase its oil and gas properties, ranking the company among the major U.S. oil concerns.

″I don’t see them leaving it in certificates of deposit. That’s not their style. They’re not caretaker managers,″ Dodge said.

Last year, Pennzoil reorganized into four entities: a parent company holding oil and gas reserves and the $10.3 billion judgment; a motor oil manufacturing and marketing unit; a sulphur mining unit; and a unit holding cash, real estate and gold ventures.

At any time, the parent company could spin off, sell or otherwise dispose of the other three units, raising more cash to supplement the payment it will get from Texaco.

″It could become one of the major oil companies in the United States, raising itself from the second tier,″ Hindes said. ″It could leverage that money to $6 billion, $8 billion, maybe $10 billion, to buy oil and gas properties - or it could go after other companies.″

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