A valuation report in the CITGO auction process established that the price of PDV Holding Inc. (PDVH) shares — the owner of CITGO Petroleum Corp. — is USD 18.6 billion, while criticizing the management of the judicial expert for overestimating the legal risks of the sale process.
This information is contained in a supplemental statement that Randall J. Weisenburger presented to the U.S. District Court for the District of Delaware, where the case of Crystallex International Corp. against the Bolivarian Republic of Venezuela is ongoing, which encompasses the sale of the Venezuelan refinery.
The valuation report is signed by José Alberro and argues that the expert Pincus did not maximize the value of PDVH shares due to an exaggerated assessment of the legal risks and a bidding process that disadvantaged strategic bidders in favor of credit bidders.
Additionally, it suggests that the financial incentives of Evercore, the advisor, may have contributed to recommending an inadequate offer.
The appraisal is based on discounted cash flow (DCF) approaches, market multiples, and comparable acquisitions. It also analyzes market dynamics in refining, including the impact of the energy transition and projections of oil supply and demand.
Review of the CITGO Auction
Randall J. Weisenburger, founder and managing partner of Mile 26 Capital, presented his valuation of the CITGO auction in a report that synthesizes his concerns regarding the sale process of PDV Holding Inc. (PDVH) shares overseen by the judicial expert, Robert B. Pincus.
The report incorporates expert valuation from José Alberro, PhD, from FTI Consulting, regarding the fair market value of PDVH shares and its underlying assets.
Weisenburger argues that the sale process designed and implemented by Pincus “could never generate a fair market value for PDVH shares,” resulting in a sale that “does not reflect anything close to the fair market value of the shares.”
He states that the judicial expert appointed by the Delaware Court to oversee the CITGO auction did not design an appropriate process for a complex commercial asset like PDVH shares, but instead opted for a bankruptcy sale approach for distressed assets, despite CITGO being a “prosperous business.”
What the Judicial Expert Overlooked: CITGO is a Prosperous Business
According to Randall J. Weisenburger, the judicial expert of the CITGO auction, Robert B. Pincus, did not seriously consider, nor did he utilize alternative processes like an initial public offering (IPO) or a private placement for the shares, which would have been better to maximize PDVH’s value.
He believes that preparing for an IPO, even if it was never launched, would have had a positive net effect on the quantity and quality of bids, as it would have established a minimum price linked to the market price. Another option mentioned in the report is a leveraged recapitalization.
The insistence by the judicial expert to sell PDVH shares under restrictions similar to those used in bankruptcy sales for distressed assets — without the benefits of a bankruptcy sale — is criticized, given that CITGO is a prosperous business. Hence, the chosen modality only attracts bidders interested in buying distressed assets at a bargain price.
Favoring Credit Bidders
Randall J. Weisenburger warns that the process “favored or was forced to favor credit bidders who, because they could rely on their attached judgment as the basis for their offer, had an advantage over any non-credit bidders who might have been interested in participating.”
He asserts that this methodology discouraged participation from other bidders while creating “the absence of true competitive tension to drive up the price.”
He estimates that the winning bidder, Dalinar Energy Corporation, does not bring “new capital to the sale,” but is financed “solely through loans secured by CITGO’s assets and credit offers from the consortium of Adjunct Judgement Creditors backing the winning bidder.”
Strategic and Tactical Errors in the CITGO Auction
According to Weisenburger, the judicial expert made “numerous strategic and tactical errors” that “further undermined the probability of maximizing value.”
Among these errors, he cites the exaggeration of the risk from PDVSA 2020 Bondholders, as Robert B. Pincus excessively emphasized the risk posed by bondholders’ claims throughout the sale process.
It was a mistake not to wait for the resolution of litigation, while through Pincus’ lawyer, he publicly stated repeatedly that the claims of the PDVSA 2020 Bondholders would need to be resolved — namely, paid — as part of the CITGO auction.
This, in Randall J. Weisenburger’s view, “chilled offers and decreased the proceeds from the sale that otherwise would have gone to Adjunct Judgement Creditors.” He notes that the losses of Bondholders in litigation in 2024 “call into question the validity of the 2020 Bonds,” but the judicial expert “refused to change course and pause the sale process to consider this material change.”
Exaggeration of Legal Risks
Categorically, Weisenburger asserts that Robert Pincus exaggerated the risks from PDVH’s Alter Ego litigations, which he overvalued during the bidding process. Despite his own statements regarding the “materiality of the risks” and the court’s refusal to suspend those cases, “he insisted on pushing for the sale before mitigating the risk he had exaggerated.”
This behavior would have been detrimental to bidder participation in the process and ultimately led them to lower the proposed purchase price for PDVH shares.
He adds that Pincus did not address or mitigate regulatory barriers for the participation of strategic bidders, such as oil and gas refining companies.
Unjustifiably Low Initial Offer
Regarding the judicial expert’s recommendation of Red Tree Investments LLC as the initial bidder with an offer of USD 3.699 billion, Weisenburger emphasizes that it was “almost half the value of the next highest offer submitted,” namely, that of Gold Reserve, at USD 7.081 billion. This fact, in his view, “defeated the entire purpose” of an initial offer (stalking horse) that should establish “a high minimum price.”
This decision clearly indicated to bidders that their offer price only needed to surpass the second-best offer, while almost preventing any offers received during the Enhacement Period from matching or exceeding Gold Reserve’s proposed purchase price.
He estimates that by capitulating to the threats and demands made by bidders and certain high-ranking Adjunct Judgement Creditors at every stage of the process, Pincus conveyed the image of “someone desperate to sell the shares.”
The Price of CITGO
José Alberro estimates the “fair market value (FMV) of PDVH equity at USD 18.6 billion.
The low bid from the winning bidder differs substantially from the valuation conducted by experts, such as José Alberro, who estimates the “fair market value (FMV) of PDV Holding Inc. (PDVH) equity at USD 18.6 billion.
This figure derives from a “discounted cash flow (DCF) analysis,” considered the most “reliable and consistent” method for valuing a company. As corroboration, his market multiples analysis yields an enterprise value between USD 13 billion and USD 18.5 billion, as well as a comparable transactions analysis suggesting an enterprise value of approximately USD 16.2 billion.
Alberro emphasizes that the FMV is the price agreed upon between a “willing seller and a willing buyer under normal and ordinary circumstances, after considering all available uses and purposes, without any obligation from the seller to sell or the buyer to buy.”
The valuation presented in 2012 by Evercore, namely, the advisor to the judicial expert, assigned a “midpoint discounted cash flow (DCF) value” of USD 13.2 billion to PDVH shares. The re-evaluation corrected tax treatment and perpetuity growth rate assumptions, resulting in USD 16.907 billion.
A New CITGO Auction Would Generate a Higher Price
Randall J. Weisenburger believes that a new CITGO auction would generate a substantially higher price, as it would allow a greater number of Adjunct Judgement Creditors to be compensated and result in a concomitant reduction of PDVSA and Venezuela’s debts.
This is based on several factors:
- Greater clarity in litigation: The case of the PDVSA 2020 Bondholders has progressed to a stage where the court will soon decide on its validity and the “losses suffered” by these “have undermined their chances of success.” Judge Rakoff’s decision in the PDVH Alter Ego litigation at Girard Street is likely to be a positive driver for bidder participation in a new sale process.
- New process design: A redesigned process to market a complex and nuanced asset like PDVH shares, with a “stronger negotiating position” for the judicial expert, could yield better results.
- Mitigating regulatory uncertainty: The judicial expert could seek “pre-clearance” or “greater clarity for strategic bidders” from antitrust regulators.
- Reviewing the advisor’s incentive structure: Reevaluating Evercore’s agreement or hiring another advisor with “appropriate incentives” is “vital” to ensure that the best option is recommended, even if that means not closing a deal.