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BP Amoco Now Anglicizing Arco in $26.8 B Deal

April 5, 1999
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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&ampP 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 development."

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 combined "organisation."

"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 yours."

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 Good Friday.

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 fields."

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

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