TotalFina SA launched a bid on July 5 to take over Elf Aquitaine SA that values its French rival at 42 billion euros ($41.2 billion).
Over the past 18 months, analysts frequently mooted a merger between the two French integrated petroleum companies, even before Total and Belgian firm Petrofina SA joined forces late last year (OGJ, Dec. 7, 1998, p. 37).
While there has been much speculation about continuing merger talks between TotalFina and Elf, Elf Chairman and CEO Phillippe Jaffr? has denied any interest in such a move; no sooner had TotalFina revealed its offer than Elf declared it was hostile.
TotalFina`s offer would result in the exchange of four TotalFina shares for three Elf shares, which TotalFina says represented a premium of 15% over the closing price immediately preceding the announcement.
The price of Elf shares rocketed by 21% on the news, while the share price for TotalFina hovered around opening level. This was initially taken as an indication that markets believed TotalFina would increase its bid for Elf, perhaps substantially.
Speculation was heightened that same day when Christian Pierret, France`s industry minister, said government would not block the bid but that any other bidder-that is, any foreign firm-would require approval from the government before it could make a counter-bid.
The following day, however, Elf shares fell to slightly above the TotalFina bid level, while TotalFina shares inched up. This was seen by analysts as an indication that markets felt the takeover proposal was sound, that foreign bidders were unlikely to join the fight.
A TotalFina official told OGJ that the offer period was set at 35 days from approval of the bid by authorities. The proposed deal would need the green light from the Paris and New York stock markets and the European Union before the bid could be launched: "This could take 1-2 months."
An Elf official told OGJ that the offer from TotalFina had not been discussed with or studied by Elf`s management and was therefore being considered hostile.
The official said Elf management was formulating a response to the bid and that, as soon as this had been prepared, it would be set before the board. This had not occurred by OGJ press- time.
Motives
Thierry Desmarest, chairman and CEO of TotalFina, said: "The combination of TotalFina and Elf is a large-scale industrial project driven by the exceptional strategic fit of the two groups.
"I believe that it is necessary today to join forces to assure continued solid growth and to take our place as an oil major of the first rank at a time when the industry is restructuring on a global scale. Joining the two companies will allow us to achieve annual pretax synergies expected to aggregate 1.2 billion euros ($1.18 billion) over a 3-year period."
The merger would lead to 4,000 job losses worldwide, half of which would be in France. These would be achieved over 3 years through a combination of "natural attrition" and early retirement.
TotalFina said, "This merger need not lead to forced redundancies. At the same time, projected growth for the new group will permit substantial recruitment to continue."
Commerzbank Global Equities, a London-based unit of Commerzbank AG, suspected that the TotalFina bid for Elf may play out like the Hydro offer for Saga (OGJ, June 21, 1999, p. 24): "a French solution will be achieved, but at a higher price than Total is currently offering.
"Given that the offer is unsolicited, we suspect that, even in the absence of a third-party bid, TotalFina will have to pay up to dislodge the Elf management.
"The resultant company will be a very interesting investment with a faster-growing upstream business than any other integrated. The cheapest way to secure a position in that company is by buying Elf."
Jeremy Elden, global head of oil and gas research at Commerzbank, told OGJ at presstime that the deal was most likely to go through but that it would probably be sweetened a little.
"The takeover makes industrial sense," said Elden. "Now all the argument will be about the price. The French government has indicated that no other companies will be allowed to bid, and no others have said they are interested."
Earlier, Commerzbank had said it would not rule out third-party interest in buying Elf, particularly from Royal Dutch/Shell, Chevron Corp., and Italian state firm Ente Nazionale Idrocarburi (ENI). Even without their interest, the bank expects Elf to seek a higher price from TotalFina.
To enable the deal to go through unhindered, the French government would have to override its "golden share" stipulation regarding Elf`s ownership, which was put in place to prevent any company building a stake larger than 10% in the former state-owned firm. TotalFina expects this to be cleared without a problem.
Assets match
The combined company would be ranked fourth among the worldwide petroleum majors, after Exxon Mobil Corp., Royal Dutch/Shell, and BP Amoco plc, and ahead of Chevron Corp. and Texaco Inc.
The TotalFina official said the companies` upstream assets were "very complementary," since TotalFina`s were centered on a west-east axis while Elf`s were scattered north-to-south.
TotalFina said the combined group would have estimated reserves of almost 10 billion boe, equivalent to 13 years worth of current production (see table).
A number of large, low-cost projects are expected to increase production by 40% by 2005.
"This growth," said TotalFina, "is double the average rate of our peers. Furthermore, the geographic overlap-notably in the North Sea and in Africa-should permit a substantial reduction in operating costs."
However, there is a substantial overlap in refining and marketing that would give the merged company six large refining hubs in Europe.
There is also overlap in several areas of chemicals. Elf in particular holds a diverse portfolio of small chemicals assets, which would likely be divested.
The combined refining and marketing would be expected to constitute a stronger and more focused platform, enabling the integration of petrochemicals with refining.
The combined R&M operations would have six main hubs. "The merger will allow substantial savings of investment with regard to the new European environmental standards," said TotalFina. "The logistics of the two groups will be optimized."
TotalFina added that the profitability of the combined marketing operations in Europe would be improved through better coverage of the region, while the market share would amount to 12%. In Africa the combine would become the leading distributor.
The enlarged company would have a strengthened position in petrochemicals, said PetroFina, in both monomers and polymers, including polyethylene, polypropylene, and polystyrene. The company would also have a strong position in specialty chemicals.
Divestment
TotalFina said it would divest assets worth a combined 6 billion euros ($5.9 billion) over the next 2 years if the deal went ahead. Most of this sum would be expected to come from the combined group ditching the pharmaceuticals assets held by Elf in the Sanofi/Synthelabo joint venture.
Commerzbank said that Elf currently holds a 35% interest in Sanofi/Synthelabo worth 10.3 billion euros ($10.1 billion), and that TotalFina has said that it will dispose of as much of Sanofi/ Sythelabo as it can.
"Although Elf is free to dispose of 16% of its interest in Sanofi/Synthelabo," said Commerzbank, "it has an undertaking not to dispose of its remaining 19.5% without the permission of partner L`Oreal. However, this undertaking becomes void if Elf is subject to a hostile bid. It may be the case that Elf may now volunteer the sale of the stake in an attempt to escape TotalFina`s clutches."
Elden told OGJ that, besides the pharmaceutical operations, the most likely casualty of a TotalFina takeover of Elf would be Elf`s Paris headquarters, which is just around the corner from TotalFina`s, plus Elf`s explorationists and products distribution operations.
Commerzbank concludes that TotalFina/Elf looks a sensible deal: "Elf has a growing upstream business with plenty of low-cost reinvestment opportunities. TotalFina has a good upstream business but perhaps a little overbiased to the Middle East. It also has a very robust chemicals business.
"Neither company has a particularly good downstream business-they are both too focused to Europe, and the very-low-margin France in particular. A breakdown of the synergy benefits suggests this is the area where TotalFina sees the biggest opportunity for cost saving, as refineries and gasoline stations are rationalized."
