EXCO Resources' CEO Has Strong Incentives to Complete the Management Buyout

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 |  About: EXCO Resources, Inc. (XCO)
by: NakedValue

EXCO Resources (NYSE:XCO) is the subject of a proposed management buyout headed by the company's CEO, Douglas Miller, and some of the company's largest shareholders. The Wall Street Journal reported on March 16, 2011 that EXCO Resources' special committee is unlikely to accept Miller's current $20.50/share offer. Miller has stated that he will not overpay for the company, but there may be strong incentives for him to complete a deal. Here is a closer look at some of the possible scenarios if the management buyout fails.

Scenario: EXCO Resources agrees to buyout with a third party

In a Form 8K filed on March 22, EXCO announced recent amendments to the company's Severance Plan. Among other things, the company increased severance pay 25% to 1.25 times base salary. Even with this increase, if the company turns down Miller's buyout proposal in favor of a superior offer, Miller's change of control severance (based on the most recent Proxy statement filed on April 29, 2010) would be $1.9 million. This may not be a lot of money for an executive who made $1.9 million in total compensation in 2009 and who has been CEO since 1997.

In a July 2010 company presentation, management valued the company at $25 to $37 per share. If the company's special committee accepts a buyout offer between Miller's offer price of $20.50 and $25, as a shareholder of 6.669 million shares, Miller faces the prospect of losing his CEO position AND receiving less than what he likely perceives to be full value for his shares.

Scenario: EXCO Resources stays public but decides to hire a new CEO

It is unclear what would happen to Douglas Miller's relationship with EXCO Resources if the special committee rejected the $20.50 per share buyout proposal and decided to stay public. While Miller could very well stay in the position he has held since 1997, it's also possible that both parties could agree to go their separate ways. If Miller leaves, under the more generous scenario, he would likely receive his $1.9 million severance. Once again, this may not be a lot of money to walk away from a position he has held since 1997.

Going Forward

While EXCO Resources' CEO may have strong incentives to complete his proposed management led buyout of the company, it is unclear if this motivation will translate into a higher bid. We continue to believe that investors will benefit from buying the stock on price weakness. Natural gas stocks have exhibited strength. For example, Chesapeake Energy (NYSE:CHK) has risen around 50% and Petrohawk Energy (NYSE:HK) has risen around 20% since EXCO first announced the buyout proposal. This industry strength along with the CEO's motivations should provide investors with some margin of safety.

Disclosure: I am long XCO.