The financial adviser who drew a cartoon portraying Kerr-McGee Corp.'s pigment business as a flower being choked by a weed, representing the company's legacy environmental liabilities, took the stand Thursday in the second week of trial in Tronox Inc.'s $25 billion suit.
Chris Watson, then of Lehman Brothers Holdings Inc., testified about his role in advising Kerr-McGee ahead of its initial public offering of shares in pigment maker unit Tronox and subsequent spinoff of the company, with an attorney for the Anadarko Litigation Trust, which is pursuing claims against the former parent as successor to Tronox, seeking to underline the plaintiff's position that Kerr-McGee was aware of the billions in environmental liabilities and specifically sought to cast them off with Tronox and thereby make itself a more attractive merger target.
The trial, which began May 15 and is expected to continue for months, pits the litigation trust and the U.S. Department of Justice, which stepped into the case during Tronox's bankruptcy on behalf of the U.S. Environmental Protection Agency as the debtor's largest creditor, against Kerr-McGee, which is now wholly owned by Anadarko Petroleum Corp.
The suit focuses on the 2005 and 2006 move that saw Kerr-McGee put its valuable oil and gas exploration and production assets into an entity known as New Kerr-McGee, leaving behind the pigment business laden with decades worth of environmental liabilities from Kerr-McGee's chemical operations.
After filing for bankruptcy protection in 2009, Tronox filed the suit in an attempt to recover $15 billion it said Kerr-McGee and Anadarko owed it as a result of the fraudulent transfer. That figure has since grown to $25 billion with interest.
U.S. Bankruptcy Judge Allan L. Gropper ruled the week before the trial began that Anadarko is not a proper defendant in the suit because it maintained Kerr-McGee as an isolated business unit.
Watson followed testimony so far from figures such as former Kerr-McGee Chief Financial Officer Bob Wohleber and ex-CEO Luke Corbett.
David J. Zott of Kirkland & Ellis LLP, an attorney for the litigation trust, focused his questioning Wednesday on the strategizing that went before the IPO and spinoff, which involved several alternatives including a possible sale of the Tronox unit to Apollo Group Inc. He sought to portray the plan's architects as knowingly loading Tronox down with the toxic assets in a bid to give Kerr-McGee a clean break so it could ultimately be bought by Anadarko for $19 billion.
He emphasized Lehman's consideration of the legacy liabilities in advising Kerr-McGee on whether to go forward with a spinoff, noting that the exploration and production assets, by being subject to the legacy liabilities, would experience a downward pressure on value. Should the exploration and production assets be separated from those liabilities, they would experience a positive shift in value, according to Watson.
"That would be one of the factors that would positively increase the value of [exploration and production]," in addition to simply being separated from the chemical business, Watson said.
Zott ended his testimony by questioning Watson about the flower-and-weed imagery that has become a focal point of Tronox's case.
"I do recall making a cartoon during the sale process of a pot with a flower and a weed," Watson said.
"What did the flower represent?" Zott asked, and Watson replied that it represented the titanium dioxide assets that Tronox was inheriting.
"And what did the weed represent?" Zott then asked.
"The legacy liabilities," Watson replied.
The defense then began its questioning, focusing on Lehman's advisement and Watson's perception of Kerr-McGee's intent in going forward with its business plan and its relationship with Lehman.
Asked about Corbett's intentions with regard to the chemicals business in 2000 when the business plan was first being developed, Watson replied: "Over time it was clear that Luke was fond of and believed in the upside inherent in the chemicals business. My understanding in 2000 was that he did not want to sell this business."
Richard A. Rothman of Weil Gotshal & Manges LLP, who represents Kerr-McGee, also homed in on the alternatives available to Kerr-McGee as it looked at how to separate its chemicals and exploration and production businesses, and thereby get more out of each than it could out of the company as a whole, the so-called sum-of-the-parts valuation.
Watson emphasized that while Lehman and Kerr-McGee were aware of the legacy liabilities, "they were not the main driving factor in the separation of the businesses," and that rather the motive behind seeking the spinoff was finding "the best way to get the highest value possible."
The Anadarko Litigation Trust is represented by David J. Zott, Andrew A. Kassof, David H. DeCelles and Jeffrey J. Zeiger of Kirkland & Ellis LLP.
The defendants are represented by Lydia Protopapas, Richard A. Rothman, Melanie Gray, Jason W. Billeck and Bruce S. Meyer of Weil Gotshal & Manges LLP, James J. Dragna, Thomas R. Lotterman and Duke K. McCall III of Bingham McCutchen LLP and Kenneth N. Klee and David M. Stern of Klee Tuchin Bogdanoff & Stern LLP.
The case is Tronox Inc. v. Anadarko Petroleum Corp. et al., case number 1:09-ap-01198, in the U.S. Bankruptcy Court for the Southern District of New York.
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