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Sunday, May 22, 2022

Wall Street West—Quiet Legal Victory Could Pump Up Image of Unocal

There’s a quiet wrinkle in an old story about Unocal Corp., the El Segundo-based oil company. And one analyst with BancAmerica Montgomery Securities has waved the “buy” flag, in part because of it.

Back in 1994, Unocal filed five patents on “reformulated” gasoline, which burned cleaner, especially during summer months. Unocal then offered licenses to other refiners to produce the reformulated fuel. The other major refiners, however, snubbed the offer and instead sued Unocal in 1995, claiming that the patents did not protect new formulations, but only sensible adjustments to gasoline refinery methods.

In 1997, the U.S. District Court in Los Angeles upheld Unocal’s patents and awarded the company $69 million from other major refiners, including Texaco, BP Amoco, Chevron, Exxon Mobil and Shell. The jury in that case found that Unocal was entitled to 5.75 cents for every gallon of gasoline sold by any refiner who infringed on the Unocal patent.

The award covered sales by its competitors during five months of 1996, including the important summer months, and was upheld by a circuit court in Washington, D.C.

Unocal has yet to calculate what it would be owed for other years, Unocal spokesman Barry Lane said last week.

The major refiners have appealed the lower federal court decisions to the U.S. Supreme Court, where the matter is pending. Here’s the new wrinkle: On Jan. 19, the U.S. Solicitor General filed a brief with the Supreme Court which said, in part, “further review is not warranted” in the Unocal patent case. No wire service picked up the story, or any major newspaper. Some analysts say the Supreme Court rarely goes against the advice of the U.S. Solicitor General. BancAmerica Montgomery oil analyst Mark Fischer issued a report recently that said, if the Supreme Court upheld the lower courts, as now expected, that would be worth up to $12 a share in value to shareholders.

As it turns out, Unocal issued no press release on the Solicitor General’s brief, on Jan. 19, or since. Why not? “We are awaiting a final decision by the Supreme Court (not to hear the case),” Lane said.

But one trader in the stock said that Unocal is only laying low. “They don’t want to alert the major refiners about (the Solicitor General’s brief). The less pressure on the Supreme Court to review the case, the better,” said the trader.

Curiously, Unocal stock has done well in the last year, but has hardly been a barnburner, considering energy prices and the possibility of a big win in court. The stock last week was trading in the $34-a-share range, up from $27 a year ago.

In fact, analysts are mixed on the stock. According to a review by the Chicago-based Zacks Investment Service, among rated analysts there are five “strong buys” out on Unocal, nine “moderate buys,” and 10 “holds.” Indeed, on Jan. 2, major brokerage Bear Stearns & Co. downgraded the stock to a “neutral” from a “buy,” even as it increased its forecasted earnings per share for Unocal to $3.25 a share in 2001, from $3.15 a share. In other words, even at a thrift-shop 10 times earnings, Bear Stearns does not like Unocal.

Why the ambivalence? Fischer of BancAmerica Montgomery said last week that Unocal has underperformed analyst expectations in the last two years, causing ill will. Additionally, many analysts say that oil prices are high now. Declines may be next, which, he said “would hurt an oil stock like Unocal.”

But one local trader remains high on the stock, citing large buys by Unocal insiders. “The top 10 executives early last year borrowed $30 million from Unocal to buy the stock,” said the trader. “They weren’t granted options. They borrowed the money to buy the stock. That tells me something is up.”

Power and Bonds

Keeping an eye on the power crisis and its effects on California state credit ratings is Mary Beth Syal, municipal bond portfolio manager at Payden & Rygel, the $34 billion downtown money management shop. The sheer size of the proposed new state energy revenue bond offering $10 billion is a bit unsettling to some muni bond investors, although the market stabilized in recent trading, said Syal. Currently, the state of California has nearly $30 billion in bonds outstanding, so the $10 billion is quite a slug.

On the other hand, demand for munis has been strong in the last year, as investors have begun favoring perceived safer securities. Additionally, California state and local agencies have issued about $5 billion to $10 billion less in bonds in 1998 and 1999 than in preceding years, as governments were flush with tax receipts and could avoid issuing debt. “So the supply has been cut,” said Syal.

Indeed, California investor demand for “double tax free” bonds has pushed annual yields down to 4 percent on such instruments. “But that is like 6.9 percent, if you compare it to a taxable bond,” she said.

Cardboard Bet

Some old money has come into an old part of town Santa Fe Springs, the manufacturing-warehousing hamlet south of downtown that’s long been an industrial hub.

Wisconsin-based Menasha Corp., a maker of cardboard boxes founded in 1849, recently acquired the $45-million-in-sales Accurate Container Corp., also a manufacturer of corrugated containers and displays for in-store sales.

The deal is considered a “strategic acquisition” by J. Lindsey Alley, senior vice president at Houlihan Lokey Howard & Zukin, the Century City-based financial house that advised Accurate Container, founded in 1972, on the sale.

While venture and private equity has drifted to the sidelines of late, and leveraged buyouts have become difficult to finance, banks and other lenders are willing to step up to the plate for a strategic deal in which there is a good fit between buyer and seller, said Alley.

“Menasha is strong in the Midwest and wanted to expand to the West Coast, and they chose to expand by acquisition,” he said.

The rising price of cardboard boxes, noted by many Southern California manufacturers, did not play a role in the buyout, said Alley. “Menasha was impressed with the management of Accurate Container, which has established good relations with jobbers in Southern California,” he said. (Jobbers serve a similar function to brokers in relations between the factory and its customers.) In the Midwest, Menasha tends to sell directly to customers, and thus had no experience with jobbers, and decided that acquiring a company along with its management was the best course, said Alley.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at sevencontinents@mindspring.com.

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