ARCO agrees to acquire Union Texas

ARCO has agreed to acquire Union Texas Petroleum (UTP) in a deal valued at $3.3 billion, including debt and Union Texas preferred stock.

Under the definitive merger agreement, ARCO was to launch an all-cash tender offer for all outstanding shares of UTP common stock by May 8. Then, ARCO will acquire any shares not purchased in the tender offer for $29/share cash.

As of Mar. 31, UTP had about 85.25 million shares outstanding.

In connection with the deal, Kohlberg Kravis Roberts & Co. will tender to ARCO its holdings of 25.6% of the outstanding UTP common shares.

The agreement has been approved by both companies' boards.

ARCO building block

ARCO Chairman and CEO Mike R. Bowlin called the agreement "an important building block" for his company.

"This acquisition is consistent with our strategy of building scale and presence in five to six core producing areas as a means of creating shareholder value. Over 90% of Union Texas' assets are located in ARCO's core producing areas-specifically Venezuela, Indonesia, the North Sea, and Alaska."

Bowlin expects the merger eventually to yield after-tax cost savings of at least $85 million/year.

ARCO plans to shut down UTP's Houston headquarters, where 300 UTP employees and 80 contractors work. The firm has not announced how many of UTP's 1,400 employees worldwide will be offered positions with the merged company.

What ARCO gains

The transaction will add about 140,000 boed to ARCO's production this year. Much of that production growth is expected from UTP's Boqueron and DZO concessions in Venezuela, the U.K. North Sea's Britannia field, and the Alaskan North Slope's Alpine field. ARCO is operator of Alpine.

The transaction also will add 573 million boe of proved reserves to ARCO's assets at a gross cost of $5.76/boe. ARCO estimates it is paying approximately $5/boe for proved reserves, based on costs attributable to producing assets.

Probable and possible reserves also have been identified for development.

"In addition to strengthening our core areas," said Bowlin, "Union Texas offers several new venture options to ARCO, ranging from its long-established operations in Pakistan to its growing position in Kazakhstan and Azerbaijan in the Caspian region. (And its) long-term experience in Indonesia's LNG business should prove valuable as we continue development and marketing of ARCO's Tangguh gas reserves."

UTP Chairman and CEO John Whitmire said, "Over the past 2 years, Union Texasellipse(has) made significant progress in creating exciting growth prospects for our company in areas such as Venezuela, Kazakhstan, China, and northern Africa. I believe it was Union Texas' growth performance that attracted ARCO to our organization."

Bowlin expects the acquisition to be accretive to operating cash flow in the first year and only modestly dilutive to earnings through 1999. He says there is little downside risk involved in the deal because UTP's production from known resources is increasing, and the anticipated cost reductions are completely within ARCO's control.