Activist investor Carl Icahn has amassed a 7.5 percent stake in Chesapeake Energy Corp. and called for the replacement of four board directors at the energy company.
After two weeks of rumors about his purchase of Chesapeake shares, Icahn said in regulatory filings Friday afternoon his affiliated partnerships spent more than $785 million to buy more than 50 million shares. Icahn companies began buying shares April 19, just one day after Reuters began publishing a series of revelations about personal loans taken out by Chesapeake's chairman and CEO Aubrey McClendon.
Icahn sent a letter to Chesapeake's board of directors calling for the immediate replacement of four board members. He suggested they be replaced by two directors picked by him and two by another large shareholder. Icahn pointed to other companies he's invested in that made changes to their boards.
“We believe that
In a statement, Chesapeake said it will carefully review Icahn's letter.
“We share Mr. Icahn's belief that Chesapeake shares are substantially undervalued by the market today,” the statement said. “The board and senior management are executing a plan that we believe will deliver a higher stock price and better recognize the underlying value of the company's assets.”
The board said its immediate priority was finding a nonexecutive chairman to replace McClendon, who will remain as CEO.
“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,” Chesapeake said.
Oppenheimer analyst Fadel Gheit said bringing in new board members would be a “very positive” move in the eyes of investors and analysts who follow Chesapeake.
Phil Weiss, senior energy analyst at Argus Research, said it seems Icahn's relationship with Chesapeake has turned adversarial, but that could benefit shareholders.
“Anything that can spur real change is a potential plus,” Weiss said.
Icahn isn't the first Chesapeake shareholder to call for new leadership at the company in the last several weeks.
Earlier criticism was leveled by New York City Comptroller John C. Liu and two leading shareholder advisory services, who recommended against re-electing board members Burns Hargis and Richard K. Davidson at next month's annual meeting. Chesapeake's largest shareholder, Southeastern Asset Management Inc., also expressed its displeasure with the board and company strategy earlier this month. Southeastern owns about 13.6 percent of Chesapeake's outstanding shares.
Chesapeake defended the candidacy of Oklahoma State University President Hargis and former Union Pacific Corp. executive Davidson this week, but Icahn maintains change is needed.
In his letter, Icahn said he thought Chesapeake had collected some of the best oil and gas assets in the world. But he said the “stock price suffers because of the enormous risk associated with an ever-changing business strategy, enormous capital funding gap, poor governance and unchecked risk taking.”
He closed the letter with a warning to directors.
“Therefore, if you continue to arbitrarily refuse the request we have made for shareholder representation, we, as activists, will immediately take whatever ‘actions' we feel are necessary to protect the value of this company,” Icahn wrote.
Icahn previously bought into Chesapeake in December 2010, when he disclosed a 5.8 percent stake. The company soon promised to sell assets and reduce debt, pushing its stock to more than $35 per share in February 2011. Icahn then sold enough stock in the next several weeks to push his stake below the 5 percent level that requires regulatory disclosure.
He reminded the board of his previous investment in Friday's letter.
“In part, we believe, due to our presence, the company sold non-core assets, closed their funding gap and announced that they were through spending money on land,” Icahn wrote. “Shareholders rewarded the company for this newfound responsibility, and the stock rallied.”
Chesapeake shares are down more than 14 percent since mid-April. The stock gained 23 cents to close at $15.81 on Friday. The stock continued to gain in after-market trading.