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BP Amoco, Arco talk deal
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March 29, 1999: 5:19 a.m. ET
Oil giant seeks $25B all-stock tie to preserve future of Alaskan field
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LONDON (CNNfn) - BP Amoco confirmed Monday it is in talks with Atlantic Richfield about a "possible combination", a deal that could be worth as much as $25 billion.
Atlantic Richfield is the seventh-largest U.S. oil company and has extensive operations on the West coast. Its largest asset is the giant Prudhoe Bay development in Alaska. The field was developed in partnership with BP and analysts view the bid as an attempt to shore up the economics of the huge but expensive field.
"It's by far the biggest asset of both companies and they would see economies of scale from bringing them together," said Alex Kemp, professor of petroleum economics at Aberdeen University.
BP Amoco has been anxious to highlight its diversification away from Prudhoe Bay but the field accounted for close to half the group's profit prior to the Amoco merger, and a higher percentage for Atlantic (Arco). Kemp said the high production and transport costs from the field at a time when production has past its peak point will determine the premium which BP Amoco is prepared to pay.
BP Amoco executives face two main challenges in completing a deal. A surge in Amoco's share price could threaten the all-stock plan. Analysts also remain wary about the ability of management to absorb another acquisition so soon after the $48 billion takeover of Amoco.
Arco (ARC) shares closed Friday at 65-3/8 and reports suggest BP Amoco is considering a premium of around 20 percent making the $25 billion deal worth some $77 per share.
BP Amoco shares surged in London trading Monday, jumping 3.2 percent to 1,070 pence.
Richard Hunter, oil analyst at Fitch-IBCA, said BP management has been given credit for its handling of the Amoco merger but there remains a danger "that they could have bitten off more than they can chew" in pursuing Arco.
Hunter said BP Amoco's AA credit rating is under review for upgrade, and its handling of another merger could prevent it reaching a top-notch AAA rating. Failure to reach a AAA rating would hurt BP's capital spending program at a time when exploration activity is being boosted in the wake of the rising oil price. Diluting the all-stock plan with a cash or debt element would also have a negative effect.
Analysts do not believe a formal approach will flush out rival suitors as potential bidders such as Chevron already have extensive operations on the U.S. West coast which would raise antitrust concerns should they seek to outbid BP Amoco.
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