BP/Amoco merger creates third 'supermajor'

Anne Rhodes
Associate Managing Editor-News
Patrick Crow
Energy Policies Editor

In a move characterized as the "largest ever industrial merger," British Petroleum Co. plc and Amoco Corp. have agreed to unite their businesses on a global and comprehensive basis.

The combined firm, to be based in London, will be the U.K.'s biggest company. BP will hold a 60% equity interest, and Amoco 40%.

Called BP Amoco plc, the firm will be "one of the most comprehensive and competitive energy and petrochemical enterprises in the world," according to Amoco. The merger catapults BP and Amoco into the ranks of the top three energy majors, along with Royal Dutch/Shell and Exxon Corp.

"BP Amoco moves into the top three within the industry in most all statistical, operating, and financial categories," said Amoco Pres. William Lowrie. "With a combined market capitalization of about $110 billion, we will be among the 15 largest publicly traded companies in the world.

"Work already done indicates we can realize operational synergies and cost savings of at least $2 billion, pretax, annually by yearend 2000, with more upside beyond," added Lowrie. "These savings are in addition to the improvements already targeted by the separate organizations."

Amoco's Chicago headquarters will become headquarters for BP Amoco's North American refining, marketing, and transportation business, and eventually for its global chemicals business. Exploration and production operations for the Western Hemisphere will be managed from Houston, where both partners have offices.

Over time, all BP retail outlets in the U.S. will adopt the Amoco brand name. BP retail sites outside the U.S. will continue to carry the BP name.

The merger has been approved by both companies' boards. It now awaits shareholder approvals and regulatory clearances.

(For late-breaking news developments on this story, see this issue's Newsletter.)

Synergies

Lowrie expects both firms to benefit from their complementary strategic and geographic strengths. He also believes the diversified business portfolio of the merged company will support performance during down cycles.

When the partners' resources are combined, says BP Deputy CEO Rodney Chase, BP Amoco will have:

Production of about 3 million boed.
Reserves of about 14.8 billion boe.
Leadership positions in oil in Alaska, the Gulf of Mexico, the North Sea, and the Caspian Sea.
A leading position in the U.S. gasoline market.
A world-class series of chemical businesses.

Lowrie gave details of the initial cost savings that the partners expect to achieve as a result of the merger: "The additional synergies arise from increased organizational efficiency at line and staff levels ($1 billion), more focused exploration ($300 million), streamlining of business process ($200 million), improved procurement ($250 million), and rationalization of duplicate operations ($250 million). These alone can improve our combined bottom line by more than 20% annually, compared with today's levels.

"In addition," said Lowrie, "we expect to find opportunities to high-grade our portfolio of businesses, to focus our combined strengths, and extract additional value from sharing our managerial talents and experiences."

Chase added, "We're not expecting to use this as an opportunity for business rationalization, but there will obviously be some centers of employment affected."

The partners' assets and market positions around the world mesh well together.

Upstream, BP is the largest oil producer in the U.S. and in the U.K. North Sea, while Amoco is the largest private natural gas producer in North America and the second largest gas reserves holder. Downstream, BP has refineries in the U.K., France, Spain, the U.S., Australia, South Africa, and Singapore. Amoco has five U.S. refineries with a total capacity of about 1 million b/d.

BP's European refineries that are involved in its joint venture with Mobil Corp. are excluded from the merger with Amoco. Chase said the BP-Mobil joint venture is "completely unaffected" by the merger.

BP also has almost 18,000 service stations worldwide; Amoco has 9,300, all in the U.S.

In the chemicals arena, BP produces about 9.4 million metric tons/year of various chemical products (see table, p. 35 [265,090 bytes]). It is a leading producer of polyethylene in Europe and supplies more than 90% of the acrylonitrile technology in use worldwide. It is also one of the largest manufacturers of styrenics in Europe and a leading producer of polybutene there.

Amoco has about 13 million metric tons/year of chemicals capacity. It is the world's largest producer of purified terephthalic acid (PTA), paraxylene, polybutene, and poly alpha-olefins. It also is a major producer of linear alpha-olefins and polypropylene.

Analysts' view

Adam Sieminski, of BT Alex Brown, Baltimore, said, "This makes for a very interesting, very sizable company. It puts BP-Amoco in competition with Exxon Corp. and Royal Dutch/Shell for sheer size. It makes them one of the supermajors."

He said some mergers are intended to overlap operations to improve market share in regions, but this one is purely complementary.

"It makes Amoco less sensitive to natural gas and chemicals and BP less sensitive to crude oil, making a better-balanced company than BP or Amoco were alone.

"There have been huge consolidations in other industries, but not the major international oils. This probably means the wave of consolidation that prior to this had escaped the major companies may be under way.

"The next question is whether Mobil Corp., Chevron Corp., ARCO, and Texaco Inc. will be content to be in the second tier."

Philip Verleger, of PKVerleger LLC and Brattle Group, Boston, said, "This is a really competitive industry. This merger strikes me as exactly what has to happen, and I think we will see more of them. This is really where the productivity gains of the industry can be achieved."

Verleger added, "Every other sector of the economy has seen larger mergers than this in the past several years. Regulators are taking the view that bigness isn't necessarily bad, and the companies have seized on this and tried to achieve some productivity gains."

Merger motivation

Other oil industry analysts agreed that BP and Amoco's operations were complementary.

John Lichtblau, president of the Petroleum Industry Research Foundation, New York, said, "There's some logic to the merger when you look at it. It gives BP access to the U.S. natural gas market, because Amoco is a big gas producer, while BP has no gas here. It gives Amoco access to huge oil supplies overseas and in Alaska. And downstream, it gives BP access to the U.S. market more than it has now.

"I think they will combine their operations in the U.S. very rapidly," he added.

"It could be a good marriage. Each one has something that the other one doesn't have."

Lichtblau said the merger would have no impact on competition in the U.S. "Even the combined company isn't that big, in terms of dominating the market."

He added, "With oil prices as desperately low as they are now, anything that the industry does to survive should be accepted," by federal regulators.

Lichtblau conjectured that the merger "may be somehow connected with very low oil prices, which are likely to stay for a while," although neither BP nor Amoco mentioned the recent oil price climate as a reason for their decision.

"The motivation to cut costs is bigger when profits decline," added Lichtblau, "and that has been very much the case for both of these companies. You may see others follow suit."

Cyrus Tahmassebi, of Energy Trends Inc., Bethesda, Md., contends that the merger was forced by low prices and a very competitive retail market.

"The objective here is to reduce costs, stay competitive, and increase shareholders' value. There's a tremendous amount of pressure on companies to show better performance. With the current low oil prices and lower refining margins, what else can they do except try to reduce their costs?"

Tahmassebi said, "In the old days, if the downstream was bad for the integrated companies, they could make money upstream.

"This tells me that what the companies see for the upstream today might be around for some time."

The deal

The merger was characterized by Amoco as "completely friendly." The two firms had been doing business together for some time.

Lowrie said, "We've had a lot of involvement and relationships over the last several years with British Petroleum-the big transaction we did in Azerbaijan. We followed that up by bidding jointly in Venezuela on the exploration blocks down there.

"I think our values and our approach to doing business is very common," added Lowrie.

Chase said the companies had worked together a great deal, and their relationship just developed. He said the participants have been unable to pinpoint who first suggested the idea of a merger: "It just happened."

Under terms of the deal, Amoco will be merged into BP, with BP shareholders having about 60% of the combined entity, and Amoco shareholders about 40%.

Amoco shareholders will receive 3.97 BP ordinary shares for each Amoco share held at closing. The shares will be delivered in the form of BP Amoco American Depository Receipts (ADRs). Each ADR will represent six BP ordinary shares.

Expressed in terms of ADRs, each Amoco share will fetch about 0.66 ADR. The exchange is expected to be tax-free.

The merger will be accounted for on a pooling-of-interests basis. BP will report its results in U.S. dollars under U.K. generally accepted accounting principles (GAAP), with supplementary U.S. GAAP information.

The merged firm will be governed by a team composed of members from both companies. Amoco Chairman and CEO Laurance Fuller and BP Chairman Peter Sutherland will be cochairmen of the board of BP Amoco. BP CEO John Browne will be chief executive.

Browne also will chair the management committee, with Fuller as deputy chairman.

"The two will co-chair the transition team responsible for integrating the operations of the new group," said Lowrie. "Larry (Fuller) then plans to retire in the year 2000."

Chase and Lowrie will be deputy chief executives and copresidents of BP Amoco. Chase will be responsible for exploration and production, and Lowrie will direct refining, marketing, and chemicals activities.

The synergies are going to be linked to the compensation structures of the management team to ensure the delivery of new shareholder value, said Chase.

Expected closing

The firms hope to conclude the deal by yearend.

"There will be clearances required," said Lowrie. "We don't anticipate any significant problems," he added. "There may be some minor antitrust issues on the marketing side in certain markets here in the United States, but those are easily dealt with, we believe."

Sieminski said BP Amoco might have to sell a few minor assets to meet antitrust objections. "The biggest issue is going to be refining and marketing in the Midwest, where both BP and Amoco have operations."

Verleger agreed: "It's a very natural merger. The two companies have very little overlap. There's some in the Midwest (U.S.), but the gasoline market is very competitive there, anyway.

"If the Justice Department and the Federal Trade Commission apply the same merger guidelines to oil that they apply to everything else, there should be no problems."

Chase expects the necessary European clearances to be easier to obtain: "The European situation is going to be very, very straightforward here-nothing like the situation that we had when BP and Mobil were trying to put together our downstream operation.

"We've looked at this very hard with people whoellipsehave had a full year's experience of getting clearance for the last deal with Mobil, and we are tremendously confident that the European end of this does not represent a hurdle at all."

Lowrie said, "This transaction will propel the combined enterprise into the top tier of the industry immediately on essentially all statistical measures. But looking ahead, it does more than that: it creates the platform from which we can grow into a position of clear industry leadership.

"Over the long term, we believe that size, scope, and global reach are critical in dealing with the opportunity and challenges in our industry. Sheer size helps in our industry, in terms of capturing growth opportunities, in achieving economies of scale, and in insulating us from the temporary downturns that occasionally hit our industry.

"The market apparently agrees, judging from the generally higher price-earning multiples accorded our two largest competitors."