Merger and acquisition action continues to gather momentum among energy companies worldwide.
In another example of the continuing US trend toward "BTU convergence," Detroit energy firms DTE Energy Co. and MCN Energy Group Inc. have signed a definitive agreement to combine in a cash and stock merger valued at $4.6 billion.
The BTU convergence trend is manifesting itself outside the US as well. Energy and industrial groups Veba AG, Dusseldorf, and Viag AG, Munich, plan to merge to create a major energy and specialty chemicals company.
In petroleum company M&A action (see related story, p. 34), Chevron Corp. has acquired Petrolera Argentina San Jorge, which claims to be Argentina's fourth largest oil and natural gas producer and second largest exporter. Chevron beat out several other firms bidding for San Jorge, including Unocal Corp. and Argentine firm Perez Companc. While the financial details of the transaction were not released, industry analysts place the value of San Jorge at about $1 billion.
Meanwhile, Mitchell Energy & Development Corp., The Woodlands, Tex., has engaged investment bankers Goldman, Sachs & Co. and Chase Securities Inc. to advise the company on strategic alternatives, including possible transactions that might result in a sale or merger. Among those options is the prospect of continuing to operate independently. Mitchell is one of the biggest independent US producers of natural gas and NGL.
DTE-MCN
The merger of DTE and MCN, already unanimously approved by both firms' boards, is expected to close within 6-9 months. The transaction is subject to shareholder and regulatory approvals.
Under the deal, DTE will acquire for $28.50/share all of MCN's outstanding shares totaling roughly $2.6 billion. (With the assumption of MCN's debt, the value of the deal increases by $2 billion.)
The newly formed company will be called DTE Energy Co. and will be based in Detroit, becoming the largest Michigan electric and gas utility. The combined firm will have more than 11,000 Mw of power generating capacity, 600 bcf/year of natural gas delivery capacity, and 185 bcf of gas storage capacity. Assets for the new firm will total more than $17 billion, while annual revenues are projected to top $6 billion.
The new DTE will have about 11,500 employees and supply electricity to 2.1 million customers and gas to 1.2 million customers in Michigan.
Once the merger is completed, MCN Chairman and CEO Alfred R. Glancy III will retire from MCN and join DTE's board of directors. Anthony F. Earley Jr. will retain the role of chairman, president, and CEO of the new DTE.
Synergies, benefits
Both firms note apparent synergies and benefits that would be realized through the proposed combination. MCN's gas utility, Michigan Consolidated Gas Co., and DTE's electric utility, Detroit Edison, will retain their corporate identities and be operated as units under the new firm.
"By combining DTE's experience in power plant operations, coal management, and power marketing with MCN's expertise in natural gas purchasing, transportation, storage, and marketing," said the firms, "the combined company will be well-positioned to market coal, gas, and electricity in the region and to compete more effectively in the development of new power plants and distributed generation."
In addition, say the firms, the transaction would create a fully integrated electric and natural gas company with a "strong regional energy infrastructure and competitive operations spanning the energy value chain."
"This strategic merger is an extraordinarily good business fit for both of our companies," said Earley. "We are bringing together two complementary businesses and skill sets to create a world-class, integrated energy company with a focused strategy and the financial strength, asset mix, and scale critical to competing in today's deregulating environment," he said.
Glancy said, "Our two companies have embraced similar energy-related growth strategies. This combination will create value for MCN's shareholders, through both the 60.6% offer premium over our closing stock price last Friday and an effective 56.5% dividend increase for each share of DTE stock they receive, and will provide shareholders an opportunity to benefit from the combined company's future growth."
Merger reaction - Market reactions to the firm's merger plans were mixed. Moody's Investors Service placed the long-term debt and preferred ratings of MCN Energy Group (senior, unsecured Baa3) and the long-term debt, preferred ratings of MCN Energy Enterprises (senior, unsecured Baa3; Prime-3 rating for commercial paper) on review for possible upgrade.
Michigan Consolidated Gas Co.'s A2 ratings for senior secured debt and its Prime-1 rating for commerical paper, however, were placed under review for a possible downgrade by Moody's.
"Our review for possible downgrade of Michigan Consolidated ratings will examine the extent to which the additional debt that will finance the planned merger could cause additional dividend pressure on Michigan Consolidated Gas," said Moody's.
Veba-Viag merger - The combined company resulting from the Veba-Viag merger will have a new name, to be announced in a few months' time, and will be based in Dusseldorf. Veba will contribute 67% and Viag 33% of the combine's assets.
The merger will be achieved by giving Viag shareholders 1 Veba share for every 2.8 Viag shares. In addition, Veba will acquire 10% of Viag's share capital from the Bavarian regional government for 1.592 billion euros ($1.7 billion).
Central to the plan are the electric power generation businesses of the two conglomerates: Veba's Preussen- Elektra covers northern Germany and Viag's Bayernwerk the south. Veba said the merger would make the new group the leading electricity generator in Europe and Europe's third largest utility.
The two companies described their respective portfolios of power generation assets as an ideal match, providing low-cost electric power from coal-fired, nuclear, and hydroelectric plants spread around the country.
The companies' electric power distribution grid would stretch from the Baltic Sea to the Alps, giving it access to Scandinavia's liberalized power market and Eastern Europe's growing economies.
Veba said the new group would also have market position in natural gas and water distribution, with potential for growth as these two industries are also liberalized across Europe.
The companies envision cost savings of at least 800 million euros ($855 million) by 2002, of which two thirds would come from lower material costs and one third from lower personnel costs. About 700 million euros ($748 million) of the anticipated savings are expected to come from the power business.
During the merger, the combine plans to dispose of a number of noncore activities. These include both companies' telecommunications businesses, Viag's packaging and aluminum interests, and Veba's logistics operations.
Veba and Viag intend to dispel the anticipated concerns of Europe's antitrust authorities by opening its electric power delivery area to unhindered transmission access by third parties. The companies hope to complete the merger by summer 2000.
Of the two companies, only Veba has oil and gas interests; these include nonoperated exploration and production operations in the North Sea, North Africa, and the former Soviet Union, along with interests in four German refineries and a 55.9% interest in German retailer Aral AG.
Chevron-San Jorge - Its acquisition of Petrolera San Jorge gives Chevron gross operated production of about 78,000 b/d of oil and 40 MMcfd of gas. San Jorge is responsible for about 8% of the oil production in Argentina and has proved reserves of more than 180 million boe, with potential reserves of more than 400 million boe.
The company's overseas upstream investment arm, San Jorge International, also has 5 million acres of exploration acreage in key petroleum basins in Colombia, Ecuador, Peru, Bolivia, and Chile, and it had been considering farming into a natural gas exploration project in Brazil before its acquisition by Chevron.
San Jorge is Argentina's second largest crude oil exporter. It owns a 14% equity interest in Oldeval, Argentina's major export pipeline to the Atlantic coast, and has additional export access through the Transandino pipe- line to Chile's Pacific coast.
"The company has a strong acreage position in Argentina's prolific Neu- quen basin and controls significant acreage in the Austral basin in southern Argentina," said Chevron.
Chevron Overseas Petroleum Inc. Pres. Dick Matzke said, "Chevron is pleased to be entering Argentina's upstream energy sector and is committed to expanding our presence in Argentina. San Jorge's strong position in Argentina, coupled with their highly skilled employees, will provide the foundation for further growth opportunities for Chevron in Latin America.
"This transaction will have an immediate positive impact on earnings and cash flow," he added. Chevron says the acquisition aligns with its strategy of growth in international exploration and production.
Argentina's Ostry and Priu families own San Jorge. The company will be renamed Chevron Argentina.