A new No. 2: BP Amoco to merge with ARCO

How BP Amoco/Arco Combined Assets Would Look [214,086 bytes]

Supermajor BP Amoco plc, itself the freshly new product of a merger, has agreed to combine with ARCO in a $26.8 billion merger that would create the world's second-biggest petroleum company.

The all-share transaction, approved by both companies' boards at presstime last week, will involve the exchange of 0.82 BP Amoco American Depositary Share (ADS) for each ARCO share.

At BP Amoco's closing price of $100.44/ADS on Mar. 26, this valued ARCO at $26.8 billion, or a premium of 26%. Based on the closing prices for both firms Mar. 31, the premium was 13%.

Savings, synergies

BP Amoco CEO John Browne said the deal would yield pre-tax savings of about $1 billion/year by 2001, beyond the $500 million in cost-cutting efforts already targeted by ARCO. Much of those savings will be found on Alaska's North Slope, where BP Amoco and ARCO currently share operatorship of the biggest U.S. oil field, Prudhoe Bay.

The deal is also expected to result in a restructuring charge of $1 billion, covering both a Stamp Duty Reserve Tax charge and costs associated with achieving new synergies.

About 2,000 jobs are expected to be lost as a result of the merger, with most of the losses occurring in the U.S. Lower 48 states.

BP Amoco claims the resulting company will have the largest oil production of any non-state-owned company.

The deal is expected to close around the end of the year.

The news surprised markets, coming so soon after British Petroleum Co. plc and Amoco Corp. completed a merger, and while Exxon Corp. and Mobil Corp. are still awaiting approval of their own merger plans (OGJ, Dec. 7, 1998, p. 42).

The combined value of BP Amoco is currently estimated at $160 billion; ARCO's valuation at about $27 billion vaults the merged company past Royal Dutch/Shell, which was recently valued at $175 billion. Exxon-Mobil would have a combined market capitalization of $243 billion.

Benefits

Market analysts see a merger between BP Amoco and ARCO as offering an opportunity to consolidate operations, and thus reduce unit costs further, and see the companies as virtually an ideal match (see table).

Both BP Amoco and ARCO have major exploration and production operations in Alaska, which would enable a combined company to make massive cuts by reducing duplication.

In the U.S. downstream sector, BP Amoco's midwestern and eastern U.S. refining and marketing operations are seen as complementing ARCO's strong R&M position on the West Coast. In addition, ARCO's R&M operations are said to be the world's most profitable.

In the U.S. R&M sector, the BP Amoco/ARCO combine would have total distillation capacity of 1.8 million b/d of crude, on a par in the U.S. with Exxon Mobil, while in retail, the network would include BP Amoco's 16,000 service stations in the midwestern and eastern U.S. and ARCO's 1,700 West Coast outlets.

BP Amoco pacesetter?

Tim Whittaker, senior analyst at the London office of Commerzbank AG, said the move shows that BP Amoco is currently setting the petroleum industry agenda.

"BP Amoco would be effectively using highly valued paper to buy an underperforming company," said Whittaker.

"The expectation of investors is that the merger will lift the returns of BP Amoco and ARCO up to the high level of the old BP.

"There is a good chance of these returns being improved as anticipated. Buying ARCO would be a logical next step for BP Amoco, although most observers would have expected such a move in about a year's time. It appears BP Amoco has picked the bottom point of the market as the best time to make a move."