BP Amoco's $26.8B deal
U.K. giant buys Arco; to create world's second-largest oil group
LONDON (CNNfn) - BP Amoco announced Thursday it would buy Atlantic Richfield for $26.8 billion, a widely rumored deal that will create the oil industry's second-largest company.
Touting the competitive benefits of the planned deal, BP Amoco Chief Executive John Browne unveiled the accord Thursday after the Arco board accepted an offer of $82.36 per share.
John Browne: architect of the deal
"This combination will give us the chance to do a number of specific things to improve ... competitiveness," he said. "We'll be able to reduce costs and overheads, we'll be able to combine and apply technology from BP Amoco and from Arco."
The bid, by which BP Amoco will offer 0.82 shares for each Arco share, provides a premium of 26 percent over Arco's share price before early reports of a possible deal, and 13 percent over Wednesday's close. It marks the second major deal for the company in the last 12 months, following BP's $48 billion buyout of Amoco wrapped up last December.
Browne said the deal will create annual savings of $1 billion a year from 2001 plus $600 million in its first full year. Savings from Arco's existing restructuring will add cuts of $500 million over two years.
The synergies are seen as ambitious by analysts but will form a centerpiece of the company's presentation to regulators at the U.S. Federal Trade Commission and the European Commission in Brussels.
"The scope for internal cost cutting has reduced," said Alex Kemp, professor of petroleum studies at Aberdeen University. "Someone ambitious like John Browne recognizes that to deal with the low oil price you have to make a step change."
Meanwhile, Arco Chairman and Chief Executive Officer Mike Bowlin said at a news conference from the company's Los Angeles headquarters that he will be leaving the company once the deal is completed.
The deal, expected to be completed by year-end, includes a lock-in and penalties to dissuade other firms from a counter bid. The company expects to take a $1 billion charge and cut at least 2,000, mainly U.S., jobs.
In Wall Street trading Thursday, Arco (ARC) fell 5/16 to 72-13/16, while the American depositary receipts of BP Amoco (BPA) tumbled 5-3/8 to 95-5/8.
BP Amoco (BPA) shares have climbed 18 percent since mid-February but the stock fell back for the third day running, down 18 pence to 1,030.5 pence.
BP Amoco's fast road to No. 2
While upbeat about the deal, one market watcher said she was somewhat taken aback that BP Amoco was so quick to land another rival after fusing BP and U.S.-based Amoco just three months ago.
"I hadn't expected BP Amoco to be really in the market for acquisitions this quickly," said Kate Warne, an energy analyst at Edward D. Jones. "What it tells me is that they have done a faster job of consolidation of Amoco's assets and they feel very comfortable going forward."
But Browne insisted BP Amoco won't run into difficulty digesting Arco so soon after the $48 million acquisition of Amoco.
"The integration is running well ahead of schedule and (we) are now operating as one company," he said.
The Arco operation will remain a separate entity to speed the deal. The deal lifts the enlarged group above Royal Dutch/Shell to claim second spot among private oil companies.
Pro forma sales would have been $94.5 billion last year and the market capitalization would be $190 billion, just behind the Exxon-Mobil combination awaiting regulatory approval.
One of the primary spurs to the raft of mergers in the industry has been recently rock-bottom oil prices.
Browne said the deal is "unusual" in coinciding with a seeming rebound in oil prices.
"The (low) price of oil clearly put pressure on us," said Browne, adding that it was Arco management that first proposed the takeover in January.
The strategic fit had been well flagged, but Browne focused on its importance in reviving its Alaskan operations and providing access to the U.S. West Coast, where Arco has a 20 percent market share in retail oil sales.
"It fulfills some of our strategic objectives, particularly in gas," Browne said. Natural gas, which is growing, would account for 35 percent of total production at the enlarged group and 38 percent of total reserves.
Arco's gas reserves -- particularly in Asia -- will allow BP Amoco to expand its exposure to the fastest-growing sector of the market. Demand for gas is growing twice as fast as oil.
The full integration of BP Amoco and Arco's operation in the giant Prudhoe Bay field in Alaska is a key driver of the deal. Browne said this will shave 80 cents a barrel from production costs, which had climbed to unprofitable levels.
The company also plans to shed $3 billion in assets to cut overlaps and meet regulatory requirements. These include unspecified terminals and pipelines, 360,000 acres of exploration rights in Alaska and, possibly, Arco's stake in Russia's Lukoil.
The deal gives BP Amoco added clout in most of the major production and retail markets, most notably in the United States.
It will add Arco's strong presence in the West Coast to its east of the Rockies business acquired with Amoco. It also will add oil and gas production in southeast Asia, Russia and the Caspian Basin and the Middle East.
The deal boosts BP Amoco's oil and gas reserves by 30 percent and possibly 40 percent, if fields in Indonesia and Qatar are fully developed. Arco also gives BP Amoco an important inroad into the China market, where the U.S. firm has a refinery joint venture.
An impact on U.S. jobs
Also Thursday, BP Amoco Deputy Chief Executive Rodney Chase said 1,800 of an initial 2,000 jobs to be cut in the wake of the deal would come in the United States.
At a media and analysts conference in New York, Chase also said he expected the main issue for U.S. regulators would be the new company's dominance of crude-oil supply to California's refiners, rather than its control of the main Alaska pipeline.
Chase, who said the company may make further layoffs over and above the initial 2,000, said the U.S. cuts would break down to about 1,400 in California, between 300 and 400 in Alaska, and a small number in Texas. The worldwide work force at Arco was 18,000 strong in January.
"We are not setting this in stone," Chase said of the job cuts. "It is only when you get working on these things do you get a true sense of how much needs to be cut."
As British Petroleum and Amoco put the finishing touches on their own blockbuster merger -- completed just three months ago -- BP Amoco announced 10,000 job cuts. BP Amoco and Arco combined would control the lion's share of the regional crude -- Alaska North Slope -- with combined production of about 800,000 barrels per day of the state's 1.2 million bpd of output.
Breathtaking nine months
The deal is the latest in a breathtaking nine months of consolidation in the oil business as the major players struggled with prices dipping below $10 a barrel. The agreement by OPEC on a 7 percent production cut has helped lift prices back toward $15, the level at which oil companies claim production and exploration becomes profitable.
Prices slipped back Thursday amid profit taking after a six-week rally. Brent North Sea futures fell more than 50 cents to $14.65 a barrel on London's International Petroleum Exchange Thursday.
-- from staff and wire reports