The British are coming back to the merger table. Still digestingits acquisition of Amoco, British Petroleum last week scrolled onenotch down the alphabetic menu of E&P companies to rest itshungry eyes on Atlantic Richfield Co. (Arco).
BP Amoco plans to acquire Los Angeles-based Arco for $26.8billion to make a combined company that would be among the biggestnon-state owned oil producers with a combined market capitalizationof about $190 billion. It appears Exxon-Mobil will be the largestoil producer with Royal Dutch Shell coming in third. BP Amoco CEOJohn Browne said the merger is the outcome of negotiations begun inJanuary after Arco management approached the company to consideroptions for closer co-operation.
Onshore in the United States and the Gulf of Mexico, Arco willadd 360,000 Boe to BP Amoco’s daily output – half of it gas,chiefly from Arco’s 82% interest in Vastar Resources Inc., one ofthe most profitable operators in the Lower 48. BP Amoco said lastweek Vastar will be retained following the deal. (A Vastarspokesman declined to comment last week). Arco’s proven gasreserves total 9.8 Tcf, mainly in the Gulf of Mexico, the UK NorthSea and the South China Sea, but it holds un-booked gas volumes ofa further 15 Tcf, mainly in Indonesia, Thailand, Malaysia andQatar. In 1998 it produced 2.1 Bcf of gas, mainly from the Gulf ofMexico, the UK North Sea and Indonesia.
In Alaska, Browne said the deal could help unlock the potentialfor large volumes of gas “which are currently uneconomic to developbut could make an enormous contribution to the energy needs of theU.S. in the next century.” BP Amoco and Arco are two of the threeowners of North Slope gas. Exxon is the third.
“We have proprietary BP Amoco technology which we believe mayallow us to convert some of that gas into liquids that can betransported through the existing oil pipeline. We have plans tobuild a $70 million pilot plant on the North Slope to test thattechnology and if it is successful, we will consider full-scaledevelopment.”
The addition of Arco strengthens BP Amoco’s gas holdingsdomestically in the San Juan, Arkoma, and Hugoton basins and in theGulf of Mexico, said BP Amoco spokesman John Lloyd. “It’s going togive us a more abundant set of distinctive assets. I’d say that BPAmoco would continue over time to optimize its portfolio, so we’renot going to rule out divestments, but at this time we don’t have areal good understanding of where those might be.”
The merger will mean bad news for a good number of Arcoemployees. About 2,000 are expected to lose jobs, mainly in theLower 48 states, and employees in Alaska are expected to beparticularly hard hit. In the months following the completion ofthe BP Amoco merger, 10,000 employees of the combined company gotwalking papers. “It’s an asset play. They don’t want any of thepeople,” said Carol Freedenthal, principal with Houston-basedJofree Corp. “I think they’ll have to sell some things and do someadjustments in order to get it to go through [the Federal TradeCommission].” Not many Arco people are expected to remain with thecombined “organisation.”
“There’s no question that BP wants to be big.”
With this latest deal and the ongoing Exxon-Mobil pairing, theranks of the majors are thinning. Freedenthal said he thinks downthe road industry players will either be very large majors or smallindependents, with the smaller majors and larger independentshaving been gobbled up (some perhaps like kippers) along the way.Freedenthal noted rumors that Texaco is going to buy BurlingtonResources and that Chevron and Texaco are rumored to be consideringa combination of their companies.
Freedenthal predicts Shell is going to “wake up and dosomething, too. Don’t think they’re out of the game. When you getinto that group of society, the mentality is mine’s bigger thanyours.”
BP Amoco’s bid for Arco was announced Thursday following rumorslate in the previous week. BP Amoco’s closing price on the New YorkStock 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 significantlyhigher than the previous Friday’s. On Friday, March 26, BP Amococlosed at 100.44, and Arco closed at 65.38. There was no trading onGood Friday.
BP Amoco said $1 billion in expected synergies – which are ontop of $500 million in cost-savings already targeted by Arco -would be achieved from a mix of organizational efficiencies, morefocused exploration, improved business processes including IT, andrationalization of operations. The company said that it expected totake a restructuring charge of $1 billion on the transaction.
Some $710 million of the synergy savings are expected fromexploration and production, including $200 million fromstreamlining Alaskan operations. Some $110 million are targetedfrom refining and marketing and $180 million from corporate costs.
The all-share transaction, approved by the boards of bothcompanies, will involve exchange of 0.82 BP Amoco AmericanDepositary Shares (ADS) for each Arco share. At BP Amoco’s closingprice of $100.44 per ADS on March 26, this valued Arco at $26.8billion, representing a premium of 26%. Based on the closing pricesof the two companies last Wednesday the premium was 13%.
The deal will substantially boost BP Amoco’s reserves andproduction, giving it the largest oil output of any non-statecompany, and will consolidate its position in Alaska, wheresynergies and cost-savings are likely to increase the region’scompetitiveness and significantly encourage future investment.
“For BP Amoco, the strategic rationale for this deal is theimmense potential it offers for future growth,” Browne said. “InAlaska in particular, the synergies we can achieve from combiningour operations will greatly increase the competitiveness of thestate in the face of uncertain oil prices and provide a strongincentive for significant investment in existing and futurefields.”
Browne said the deal would also give BP Amoco entry to the keyU.S. West Coast retail markets where Arco has a leading marketshare in five states and owns two of the most efficient refineriesin the region. With the prime refining and retail network BP Amocoalready has east of the Rockies, this makes it a coast-to-coastmarketer in the United States.
The transaction is subject to the approval of the shareholdersof both companies and the consent of various state and regulatoryauthorities, including the U.S. Federal Trade Commission (FTC) andthe European Commission. Not insignificantly, the deal wouldreunite two pieces of previously busted trust Standard Oil. Thesame is true of the Exxon-Mobil pairing.
Joe Fisher, Houston
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