Icahn buys stake in Chesapeake to force overhaul of board
BY JOE CARROLL Bloomberg News
Saturday, May 26, 2012
5/26/12 at 4:34 AM
Billionaire investor Carl Icahn bought a 7.56 percent stake in Chesapeake Energy Corp. and demanded a new slate of directors amid growing shareholder concern about the company's management.
Four of Chesapeake's nine directors should be replaced by candidates nominated by Icahn and other major investors, the 76-year-old hedge fund manager said Friday in a letter to the Oklahoma City-based company's board that was included in a U.S. Securities & Exchange Commission filing.
Chesapeake, the nation's second-biggest natural gas producer, lost almost half of its market value in the past year as the impact of plummeting gas prices was compounded by revelations that CEO Aubrey McClendon used personal stakes in the company's wells to obtain more than $800 million in private loans. The board said May 1 it will replace McClendon with an independent chairman and halt the perk that allowed him to amass personal stakes in Chesapeake property.
The company outspent cash flow in 19 of the past 21 years and warned this month that it may run out of money next year. Chesapeake is facing a $22 billion shortfall between cash flow and spending by the end of 2013, said James Sullivan, an analyst at Alembic Global Advisors in New York.
Icahn blamed the company's financial problems on a board that has failed in its duty to protect shareholder interests.
"Rather than act as a source of stability and provide assurance to shareholders, this board has led the company through a highly publicized spate of corporate governance breakdowns while amassing an astounding" funding gap, Icahn wrote in his letter.
He accused McClendon of "unchecked risk taking" and criticized the board for "half-hearted" efforts to improve governance that he said were intended to let it "skate by for one more year."
Chesapeake's immediate priority is finding a new chairman, the company said in a statement responding to Icahn's letter.
"After an independent Chairman is named, the Board's Nominating Committee will consult with shareholders and carefully review Mr. Icahn's request for Board representation," the company said.
Shares of Chesapeake shares rose 1.6 percent to $16.06 at 4:35 p.m. after the close of regular U.S. stock trading. The stock has declined 29 percent this year after a 14 percent fall in 2011.
A 7.56 percent stake would make Icahn the second-largest investor in Chesapeake, after Southeastern Asset Management Inc., the Memphis, Tenn.-based investment company run by Mason Hawkins that owns 13 percent.
Icahn's letter said he recently asked McClendon over dinner to consider allowing direct shareholder representation on the board. The idea was rejected the next day, a move Icahn described as "completely disingenuous and illogical."
"Having the current board select a new chairman without shareholder approval and without allowing for shareholder representation is akin to asking the fox, who has plundered the hen house, to choose another fox to assist it in standing guard over the remaining hens," Icahn wrote.
He recommended replacing four of the current directors with two of his nominees and two to be named by another big holder such as Southeastern. Icahn noted that director Louis Simpson, a former Warren Buffett protégé, should not be one of the four directors dismissed.
Icahn said this is his second attempt to reform Chesapeake's board in as many years. In late 2010, he said he acquired a "substantial position in the company" and used that leverage to cajole management into selling assets, closing a funding shortfall and slowing land purchases.
At the time, his requests for shareholder representation on the board were rebuffed and management soon reverted to its former strategy of large land acquisitions and costly drilling programs, Icahn said in his letter. Frustrated, he sold his Chesapeake stock.
Icahn said he expects to hear a response from the company within days, before the annual shareholders' meeting scheduled for June 8, according to the letter.
"Chesapeake shareholders will benefit neither from a constant stream of negative news reflecting upon the company's troubled past, nor from a half hearted attempt by the board to make the minimum possible number of changes to skate by for one more year," Icahn wrote. "The board must not only find a way to eliminate the enormous funding gap, but also the more substantial creditability gap."
Original Print Headline: Icahn plans shake-up at Chesapeake