Ins and outs of Elf's counter-bid for TotalFina

When Total Fina SA made a takeover bid for Elf Aquitaine early this month, Elf Chairman and CEO Philippe Jaffre kept markets waiting for a response and a bout of speculation began.

Early on the theories flying about centered around Royal Dutch/Shell, Chevron Corp., and Ente Nazionale Idrocarburi (ENI), all of which were identified by analysts as potential `white knights`. But these ideas were soon rendered irrelevant when the French government backed TotalFina`s move and also said no foreign company would be allowed to buy into the former state firm.

Another scenario had Elf merging with or even buying BG plc to sidestep TotalFina`s advances. The funding for such a move was envisaged to come from the sale of as much of the pharmaceuticals assets held by Elf in the Sanofi/Synthelabo joint venture as it could.

Elf currently holds a 35% interest in Sanofi/Synthelabo which is worth 10.3 billion euros ($10.1 billion. Although Elf is free to dispose of 16% of its interest in Sanofi/Synthelabo, it has an undertaking not to dispose of its remaining 19.5% without the permission of partner L`Oreal. This undertaking becomes void if Elf is subject to a hostile bid, which presumably was why Elf was so quick to declare the TotalFina move hostile.

TotalFina`s bid valued Elf at 42 billion euros ($42.8 billion) and was welcomed by the financial community as a sound proposal. For instance, Wood Mackenzie Consultants Ltd., Edinburgh, saw benefits for combining the two companies in exploration and production, refining and marketing, and also in chemicals, with Elf`s healthcare assets ripe for disposal.

The analyst aid TotalFina and Elf have combined reserves of 6.3 billion bbl of oil and 19.1 tcf of gas, while combined production at the end of 1998 was 2.04 million b/d of oil equivalent.

"The two companies have similar levels of reserves in Europe," said Wood Mackenzie, "predominantly in the North Sea. Elf`s position in Africa would strengthen TotalFina`s position in this part of the world, where further reserves additions are expected by both companies from recent discoveries in Angola.

"Elf has no significant reserves outside its core areas of Europe and West Africa, and unlike TotalFina does not have non-consolidated reserves, which stem from production sharing contracts in the Middle East. The addition of Elf would lower TotalFina`s weighting to gas."

In refining and marketing a merged TotalFina/Elf would be the world`s fourth largest player, behind Exxon Mobil Corp., BP Amoco plc, and Royal Dutch/Shell.

"The merged company," said Wood Mackenzie, "would have shares in 27 refineries with a combined distillation capacity of 2.485 million b/d. However, the company would be primarily a European refiner and would be the largest refiner in Europe with a distillation capacity of 2.098 million b/d, almost 500,000 b/d ahead of the current number one player, Exxon."

Rationalization of the merged company`s refining capacity in France would be required, said the analyst, to improve the quality of the portfolio and overcome competition concerns.

In France a combined TotalFina/Elf would have seven refineries with a combined distillation capacity of 1.03 million b/d, plus 6,216 gasoline stations with total sales of 1.23 million b/d.

"There does look to be a good synergistic fit between the two companies within the downstream sector outside France, "said Wood Mackenzie, "where a high degree of overlap gives scope for considerable portfolio rationalization.

"The potential for cost savings and improved efficiency in refining and marketing is significant and must be one of the main attractions of the deal as far as TotalFina is concerned.

In petrochemicals the analyst said the assets fit appears complementary and would become a major player in the U.S. In specialty chemicals, Elf`s global leadership in thio- and fluoro- chemicals would be added to TotalFina`s already strong position in adhesives, resins, and acrylics.

With acceptance being the general flavor of response to TotalFina`s bid, it came a big surprise on July 19 when Elf made a counter-bid to take over TotalFina, in which it offered three Elf shares and 190 euros ($194) in cash for every five shares in TotalFina, which valued the new Franco-Belgian major at 50.3 billion euros ($51.3 billion).

In a press statement Elf said that it had considered a combination with TotalFina as part of its continuing review of strategic options, and agreed with TotalFina that there was a compelling logic behind a merger.

"However," said Jaffre, "we believe that TotalFina`s unwelcome offer both undervalues the contribution of the Elf shareholders to the combination and misses the opportunity to create a new industrial project."

Jaffre proposed mixing and matching the assets of the two companies to create two separate units - the world`s fourth largest oil and gas group and the world`s fifth largest chemicals group - and by doing this he reckoned that Elf would be able to deliver twice the synergies promised by TotalFina.

Elf claimed it could save 2.5 billion euros/year ($2.55 billion/year) from the combine compared with TotalFina`s 1.2 billion euros/year ($1.22 billion/year). Like PetroFina, Elf envisaged 4,000 job losses.

Elf would expect to save $1.07 billion/year in exploration and production, mainly from increased capital efficiency and reduced production costs, plus $970 million/year from refining and marketing, $306 million/year from combined chemicals operations, and $204 million/year from corporate cost savings.

Trading in both shares was suspended for most of the morning of July 19, but early reports indicated that market response was skeptical.

One report said an analyst at a French bank thought that Elf had been backed into a corner and had to make some response, but that the "estimated synergies appear to be very, very high."

Following Elf`s move TotalFina issued a terse press statement: "TotalFina notes that Elf Aquitaine`s chairman now recognizes the advantages of a merger between the two French oil companies, after having rejected first its principle and then the project itself."

Later TotalFina said that Elf`s expectation of the synergies to be had by merging the two companies was much higher than its own. Following a meeting of the TotalFina board on July 21 to analyze the Elf offer, TotalFina said: "from a financial perspective, Elf Aquitaine`s project cash payment of 87 billion francs ($14 billion) would reduce the combined entity`s ability to finance major development programs for the large oil and gas reserves of the two companies."

TotalFina added that it was open to discussions which would lead towards a friendly takeover. Meanwhile, Paris stock exchange authority Conseil des Marches Financiers gave the green light to the TotalFina bid.

London`s Financial Times said "an individual close to the TotalFina board" suggested the company would sweeten its offer to Elf in time, and would study Elf`s idea of separating the oil and gas and chemicals businesses of the combined companies.

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