BP Amoco Now Anglicizing Arco in $26.8 B Deal
The British are coming back to the merger table. Still digesting
its acquisition of Amoco, British Petroleum last week scrolled one
notch down the alphabetic menu of E&P companies to rest its
hungry eyes on Atlantic Richfield Co. (Arco).
BP Amoco plans to acquire Los Angeles-based Arco for $26.8
billion to make a combined company that would be among the biggest
non-state owned oil producers with a combined market capitalization
of about $190 billion. It appears Exxon-Mobil will be the largest
oil producer with Royal Dutch Shell coming in third. BP Amoco CEO
John Browne said the merger is the outcome of negotiations begun in
January after Arco management approached the company to consider
options for closer co-operation.
Onshore in the United States and the Gulf of Mexico, Arco will
add 360,000 Boe to BP Amoco's daily output - half of it gas,
chiefly from Arco's 82% interest in Vastar Resources Inc., one of
the most profitable operators in the Lower 48. BP Amoco said last
week Vastar will be retained following the deal. (A Vastar
spokesman declined to comment last week). Arco's proven gas
reserves total 9.8 Tcf, mainly in the Gulf of Mexico, the UK North
Sea and the South China Sea, but it holds un-booked gas volumes of
a further 15 Tcf, mainly in Indonesia, Thailand, Malaysia and
Qatar. In 1998 it produced 2.1 Bcf of gas, mainly from the Gulf of
Mexico, the UK North Sea and Indonesia.
In Alaska, Browne said the deal could help unlock the potential
for large volumes of gas "which are currently uneconomic to develop
but could make an enormous contribution to the energy needs of the
U.S. in the next century." BP Amoco and Arco are two of the three
owners of North Slope gas. Exxon is the third.
"We have proprietary BP Amoco technology which we believe may
allow us to convert some of that gas into liquids that can be
transported through the existing oil pipeline. We have plans to
build a $70 million pilot plant on the North Slope to test that
technology and if it is successful, we will consider full-scale
The addition of Arco strengthens BP Amoco's gas holdings
domestically in the San Juan, Arkoma, and Hugoton basins and in the
Gulf of Mexico, said BP Amoco spokesman John Lloyd. "It's going to
give us a more abundant set of distinctive assets. I'd say that BP
Amoco would continue over time to optimize its portfolio, so we're
not going to rule out divestments, but at this time we don't have a
real good understanding of where those might be."
The merger will mean bad news for a good number of Arco
employees. About 2,000 are expected to lose jobs, mainly in the
Lower 48 states, and employees in Alaska are expected to be
particularly hard hit. In the months following the completion of
the BP Amoco merger, 10,000 employees of the combined company got
walking papers. "It's an asset play. They don't want any of the
people," said Carol Freedenthal, principal with Houston-based
Jofree Corp. "I think they'll have to sell some things and do some
adjustments in order to get it to go through [the Federal Trade
Commission]." Not many Arco people are expected to remain with the
"There's no question that BP wants to be big."
With this latest deal and the ongoing Exxon-Mobil pairing, the
ranks of the majors are thinning. Freedenthal said he thinks down
the road industry players will either be very large majors or small
independents, with the smaller majors and larger independents
having been gobbled up (some perhaps like kippers) along the way.
Freedenthal noted rumors that Texaco is going to buy Burlington
Resources and that Chevron and Texaco are rumored to be considering
a combination of their companies.
Freedenthal predicts Shell is going to "wake up and do
something, too. Don't think they're out of the game. When you get
into that group of society, the mentality is mine's bigger than
BP Amoco's bid for Arco was announced Thursday following rumors
late in the previous week. BP Amoco's closing price on the New York
Stock Exchange Monday through Thursday, respectively, was 105;
103.31; 101; and 95.81. Arco's shares on the NYSE closed at 74.06,
74.63; 73.13; and 72.44, Monday through Thursday, respectively.
Monday's closing prices for both companies were significantly
higher than the previous Friday's. On Friday, March 26, BP Amoco
closed at 100.44, and Arco closed at 65.38. There was no trading on
BP Amoco said $1 billion in expected synergies - which are on
top of $500 million in cost-savings already targeted by Arco -
would be achieved from a mix of organizational efficiencies, more
focused exploration, improved business processes including IT, and
rationalization of operations. The company said that it expected to
take a restructuring charge of $1 billion on the transaction.
Some $710 million of the synergy savings are expected from
exploration and production, including $200 million from
streamlining Alaskan operations. Some $110 million are targeted
from refining and marketing and $180 million from corporate costs.
The all-share transaction, approved by the boards of both
companies, will involve exchange of 0.82 BP Amoco American
Depositary Shares (ADS) for each Arco share. At BP Amoco's closing
price of $100.44 per ADS on March 26, this valued Arco at $26.8
billion, representing a premium of 26%. Based on the closing prices
of the two companies last Wednesday the premium was 13%.
The deal will substantially boost BP Amoco's reserves and
production, giving it the largest oil output of any non-state
company, and will consolidate its position in Alaska, where
synergies and cost-savings are likely to increase the region's
competitiveness and significantly encourage future investment.
"For BP Amoco, the strategic rationale for this deal is the
immense potential it offers for future growth," Browne said. "In
Alaska in particular, the synergies we can achieve from combining
our operations will greatly increase the competitiveness of the
state in the face of uncertain oil prices and provide a strong
incentive for significant investment in existing and future
Browne said the deal would also give BP Amoco entry to the key
U.S. West Coast retail markets where Arco has a leading market
share in five states and owns two of the most efficient refineries
in the region. With the prime refining and retail network BP Amoco
already has east of the Rockies, this makes it a coast-to-coast
marketer in the United States.
The transaction is subject to the approval of the shareholders
of both companies and the consent of various state and regulatory
authorities, including the U.S. Federal Trade Commission (FTC) and
the European Commission. Not insignificantly, the deal would
reunite two pieces of previously busted trust Standard Oil. The
same is true of the Exxon-Mobil pairing.
Joe Fisher, Houston