Mesa to Make $83 Million in Unocal Deal : Tax Accounting Will Give Pickens Group Unexpected Profit

Countering predictions by some that it would show a multimillion-dollar loss from its thwarted bid to take over Unocal, Mesa Petroleum said Monday that it will report an $83-million after-tax gain on the transaction for the second quarter ended June 30.

Analysts had predicted that an investor group led by Mesa and its chairman, T. Boone Pickens Jr., could lose between $40 million and $60 million because of the bitter takeover fight, based on its enormous costs in trying to take over the Los Angeles-based oil company. Mesa has denied such contentions since the battle with Unocal ended in late May.

Under the settlement, Mesa Partners was allowed to participate in an offer by Unocal to buy back about one-third of its stock for notes worth $72 per share. In exchange, Mesa, among other things, agreed to end its takeover attempt and to vote its remaining shares with the majority of other Unocal shareholders.

Instead of losing money, Mesa Petroleum, which accounted for more than 90% of the now-dissolved investor group, could stand to earn more than $83 million if the price of Unocal’s stock rises, said Sidney Tassin, assistant to the financial vice president of Amarillo, Tex.-based Mesa. On the New York Stock Exchange, Unocal’s stock closed Monday at $29.75 a share, up 50 cents.

Price Can Fluctuate

“That’s what we’ve been saying all along,” Tassin said. “At $29 per share (Unocal stock price), we make $83 million; if the stock goes down, then the $83 million goes down, and, if the stock goes up, the $83 million goes up.”

Mesa’s executives believe that the price of Unocal’s stock will rise, especially in light of a master limited partnership that Unocal is in the process of forming, Tassin said.

Mesa pulled a profit from the feisty, three-month battle through a combination of a gain on the sale of its Unocal notes and some clever tax accounting that will allow the company to realize about $200 million in benefits from a sizable capital loss that it will record in 1986, when Mesa sells its remaining 14.6 million Unocal shares.

Specifically, Mesa is treating the exchange of its 7.8 million Unocal shares for $565 million face value in notes as a dividend rather than a sale of stock. As a result, a large portion of the value of the notes--which Mesa has sold for $589.4 million, or a roughly $255-million gain over the cost of acquiring shares--will be taxed at the more favorable corporate dividend rate.

If Mesa holds its Unocal stock for at least one year, the tax basis of the shares it has exchanged will then be tacked onto the tax basis of the 14.6 million Unocal shares that Mesa still owns, resulting in a “very big” capital loss that can be used to offset part of the capital gains from previous Mesa takeover attempts for a net benefit of about $200 million, Tassin said.

Writing Off Expenses

Mesa also is writing off in the second quarter about $60 million in expenses and another roughly $300 million because Mesa marked its 14.6 million Unocal shares down to the current market value of about $29 per share.

“It sounds to me like pretty fancy footwork,” said Bruce Lazier, an analyst with Prescott, Ball & Turben. “I think it might be something that the IRS might challenge.”

M. Craig Schwerdt, an oil industry analyst with Los Angeles-based Morgan, Olmstead, Kennedy & Gardner, called the numbers “extremely inventive.”

“They’re taking an actual loss and converting it to a gain through tax accounting,” Schwerdt said.

Tassin said Mesa’s strategy “isn’t some trick that we found in the back of the book. This is described by Unocal on page 15 of its (exchange) offer.”

“In our particular tax posture it’s something that worked very well for us,” Tassin said.