Hydro, Repsol bids lead European M&A action

May 17, 1999
A new takeover bid has topped European energy news as Norsk Hydro AS last week made a move to swallow up fellow Norwegian firm Saga Petroleum AS, Oslo. In a week that saw the current mergers and acquisitions frenzy maintain its vigor, Spain's Repsol SA had its offer for Argentina's YPF SA accepted, while London-based Lasmo plc and Premier Oil plc waited on shareholders' decisions. Lasmo made a bid for Monument Oil & Gas plc, London, while Premier faced a bid to overthrow its current
David Knott
Senior Editor
A new takeover bid has topped European energy news as Norsk Hydro AS last week made a move to swallow up fellow Norwegian firm Saga Petroleum AS, Oslo.

In a week that saw the current mergers and acquisitions frenzy maintain its vigor, Spain's Repsol SA had its offer for Argentina's YPF SA accepted, while London-based Lasmo plc and Premier Oil plc waited on shareholders' decisions. Lasmo made a bid for Monument Oil & Gas plc, London, while Premier faced a bid to overthrow its current board.

This latest activity continues an M&A storm that has changed the face of the petroleum industry over the last 12 months or so-change that is likely to accelerate dramatically if a deal emerges from reported talks between Texaco Inc. and Chevron Corp. over a potential $125 billion merger (see Newsletter).

The bid by Norsk Hydro to take over the struggling independent Saga has come as little surprise, because Saga's assets have been devalued massively as a result of recent low oil prices and the firm has generally been viewed as vulnerable.

The news also follows the revelation that state firm Statoil AS has an internal crisis on its hands, caused by project cost over-runs and followed by a boardroom clear-out (see related story, p. 31).

Hydro-Saga

Norsk Hydro announced on May 10 a takeover offer in which Saga shareholders would be offered one Hydro share in exchange for three Saga shares.

This values Saga at about $2.3 billion, a 35% premium on the share price listed shortly before the deal emerged, and would create a combined company valued at $14 billion.

Hydro said the offer would be explained in detail to Saga shareholders in the second half of May, with a view to acceptance of the offer at the end of June. Hydro made the bid conditional on acceptance by more than 90% of Saga's shareholders.

The bid is complicated by the fact that the Norwegian state owns 51% of the Hydro conglomerate. Hydro said the bid is also conditional on current Hydro shareholders not participating in the transaction, which would give the state a 41.9% interest in the Hydro-Saga combine.

Hydro Chairman Einar Kloster said the integration of the two companies' oil and gas activities would enable the combine to reduce annual costs by $130 million.

Hydro-Saga would have combined oil and gas production of 450,000 boed, of which 188,000 boed would be attributable to Saga assets. Hydro currently has estimated reserves of 1.41 billion boe, while Saga's reserves amount to 867 million boe.

Hydro's oil and gas operations and the entire Saga company have a total of 4,000 employees. Hydro said integration would enable it to reduce total staff by 800 without losing critical expertise and experience.

Saga CEO and Pres. Diderik Schnitler said he had noted the Hydro offer and would consider it against other alternatives. Saga called an extraordinary board meeting on May 11, of which no details had emerged by OGJ presstime.

A Saga official told OGJ on May 12 that the company had not yet formally received the bid from Hydro. He declined to say whether Saga viewed the proposed takeover as hostile or friendly.

Repsol/YPF

YPF's reluctant acceptance of the takeover bid by Repsol came after a short period of speculation that it might seek more money from Repsol or look for another bidder.

The collapse of resistance followed an unsolicited takeover bid by Repsol for YPF instigated on Apr. 30, in which the Spanish state firm offered $13.44 billion cash for the 85.01% of shares in YPF which it did not own.

Repsol bought 14.99% of YPF shares from the Argentine government in January for $2 billion (OGJ, May 10, 1999, Newsletter). Since then, YPF Chairman Roberto Monti has resisted the Argentine government's moves to offload the rest of YPF to Repsol.

The YPF board reportedly capitulated because of strong support for the Repsol offer by many shareholders, an anticipated lowering of oil prices, and provisions that the Repsol offer would have to be bettered by $2.72/share.

Repsol bought YPF at a price of $44.78/share, which Monti said, "offers the best alternative of value for our shareholders in today's market conditions."

The London-based global equities analysis team of Commerzbank AG said the positive view of the Repsol takeover of YPF is that the Spanish firm is taking advantage of easy credit and the emerging market discount to take a giant leap towards its corporate goals, at little cost to earnings.

"Less positively," said Commerzbank, "one has to consider whether Repsol has the skills to make a success of such a big acquisition, in a business to which it is still a newcomer."

The bank said Repsol had managed to raise $15 billion from various sources to fund the acquisition, at interest rates of 3.6-6.5%. It contends that near-term oil prices are a critical factor in deciding whether or not the takeover will be judged a success.

"On our base-case $15/bbl Brent oil price forecast," said Commerzbank, "we view the deal as 5% earnings dilutive in 2000. Given the high gearing, there is also considerable risk in the transaction.

"However, given the potential for additional cost savings and/or earnings enhancements, the deal could easily be earnings-neutral. We calculate that, for earnings to be enhanced at $15/bbl and (with a) current Repsol share price of $19, the cost-savings figure needs to be around $500 million."

Lasmo/Monument

Lasmo made a friendly takeover bid for fellow London independent Monument, and the action is expected to meet no major obstacles.

Lasmo made an all-share bid to take over Monument, in which three new Lasmo shares would be exchanged for seven existing Monument shares. This valued Monument at £600 million ($960 million).

Lasmo said that combining the two companies would create a leading international exploration and production company with low-cost reserves, strong growth potential, and high-quality cash flow.

Among major benefits from a merger, Lasmo cites: strengthening of the enlarged group's U.K. continental shelf position; operational and marketing synergies in Pakistan; improved potential of Monument's Caspian business; reinforcement of Lasmo's Middle East focus; and extension of the scope and potential of Lasmo's North African position.

Lasmo reckons it could achieve cost savings of £6-7 million/year ($9.6-11.2 million/year) by combining the company's assets. So far, Lasmo has made no estimate of potential job losses from a merger.

The bid by Lasmo is expected to be accepted by Monument shareholders, whom Lasmo claims will receive a premium of 36% on the value of their current shareholdings in Monument.

At Monument's annual general meeting earlier this month, Chairman Tony Craven Walker said, "This is an important deal for both companies and for the independent sector.

"Even before the strategic and operational benefits from combining our closely related activities, which we see as the real driver to generate increased shareholder returns, we expect to see cost savings in present value terms of about £100 million ($160 million) or more as a result of the transaction. Some £70 million ($112 million) of this would come from cost savings, the balance coming from tax synergies and operating synergies in Pakistan."

Lasmo recently ended protracted merger discussions with U.K. rival Enterprise Oil plc, but both concluded there was little to gain from the proposed move. Both companies then opened talks with Monument (OGJ, Apr. 12, 1999, Newsletter).

Premier dogfight

Premier's management faces a headache in the form of an attempt by a small group of shareholders to seize control of the company.

Premier's annual general meeting is to be held in London on May 18, but a group calling itself the Premier Oil Shareholders Association has written to shareholders proposing they should oust the current board.

The group calling for change-led by Danish lawyer Peter Felter-suggests a new board should be appointed, led by Felter as chief executive officer and former Premier drilling operations manager Graham Burgess as chief operating officer.

Felter said he and Burgess should replace current Premier Chief Executive Charles Jamieson because, "During Mr. Jamieson's tenure, Premier's return of value to shareholders has been abysmal.

"Premier's management has long been recognized by the City (London's financial community) and the press as poor. The much-delayed 1998 results and the obvious inability to manage effectively in changing market circumstances do not hold out much hope for the future."

Last summer, the London branch of Commerzbank identified Premier as one of a number of independents that would be particularly hard hit by recent low oil prices (OGJ, Sept. 21, 1998, p. 38). Yet the bank recently upgraded its average Brent crude oil price expectation for 1999 to $15/bbl from $11/bbl, and, under this scenario, Commerzbank recommends buying Premier shares, "the cheapest stock relative to asset value."

Premier Chairman David John backed Jamieson in his own letter to shareholders: "In the last 3 years, Premier has added reserves at 80 pence/ bbl ($1.30/bbl) and last year doubled reserves, an increase of 240 million boe of commercial oil and gas at 30 pence/ bbl (48¢/bbl).

"Both these numbers are industry top-quartile performance, which any management would do well to match. The reserves have been added strategically, most of them in Premier's Far East gas core areas in Pakistan, Myanmar, and Indonesia" (OGJ, Mar. 24, 1997, p. 34).

John said that Felter and his associates do not have enough experience to manage a company such as Premier well, adding that they hold less than 0.2% of Premier's shares, a situation that "(does) not comply with the relevant legal requirements."

John added that Amerada Hess Corp., which is Premier's largest shareholder with an interest of 25%, "unanimously consider(s) that the proposals are not in the best interests of Premier or its shareholders."

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