Despite rampant rumors that there could be a competing bid for Conoco, which is engaged in a $35 billion merger of equals with Phillips, A.G. Edwards analyst Bruce Lanni isn’t buying it. The speculation has substantially increased the share price of Conoco relative to Phillips. Conoco has been trading at 5-11% premium to the merger price “suggesting that the ‘arbs’ believe there may be another bid in play.”

Some investors certainly wish there was another bid. In a class action suit filed last week in the Delaware Chancery Court, plaintiff Michael Iorio said the Phillips merger “enriches Conoco management at the expense of the Conoco public stockholders without an appropriate process to maximize the sale price of Conoco.” Iorio has sued the energy company and its directors, seeking a court order that would block a proposed merger with Phillips until all alternatives were explored to see if a better deal were available for shareholders. Iorio has also asked the court for unspecified damages to the class “as a result of the wrongful conduct” of the directors.

Under the terms of the Phillips transaction, Conoco shareholders would receive 0.4677 share of Phillips for each Conoco share they now own, which would not be a premium over Conoco’s market value. Based on Phillips closing price Nov. 16, the transaction would net $24.30/share to Conoco shareholders. Conoco shares have moved up from $24.30 on Nov. 16 to more than $27/share on Friday, suggesting that investors apparently believe that several other large operators might also be interested in acquiring the company. A counteroffer could present less of an antitrust hurdle than the Phillips deal, depending on the suitor.

Lanni said TotalFinaElf would be the most prospective candidate and possibly Italian energy giant ENI, since they essentially have no downstream exposure in the U.S. Other potential companies could include BP, RD/Shell and ChevronTexaco. “We believe only ChevronTexaco would be interested, especially since there are several synergies between the two companies’ upstream operations; and Conoco’s downstream operations in the Rockies/Mid-continent would round out ChevronTexaco’s current U.S. R&M operations. Nevertheless, with ChevronTexaco just in its initial phase of consolidating the two companies and its near-term need (as we see it) to expand its exposure to North American natural gas market (currently ChevronTexaco has a gas to oil ratio of 72%/28%), we believe this possibility is unlikely.”

Lanni said antitrust issues would preclude BP and Royal Dutch/Shell from bidding because of their strong United States. and European downstream operations. “Furthermore, in our opinion, BP is a perfectly integrated and balanced company through its past mergers and acquisitions; and Royal Dutch/Shell is more likely to acquire a company with substantial U.S. natural gas reserves.

“However, with Conoco and Phillips selecting a total of six investment bankers from major firms, this might suggest that a takeover bid was imminent. Nevertheless, given both companies’ strong desire to remain independent (as illustrated by the merger of equals) and that hostile bids in this industry are few and far between, we believe a competing bid by an outside entity is not likely at this time. We continue to view the merger favorably and reiterate our Strong Buy/Conservative rating and price objective of $34 per share.”

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