By OGJ editors
HOUSTON, Mar. 25 -- Shell Oil Co., a wholly owned member of the Royal Dutch/Shell Group, has agreed to acquire Pennzoil-Quaker State Co. for $1.8 billion in cash and $1.1 billion in debt.
The deal is worth $22/share in cash for Pennzoil-Quaker State, which will be integrated into the Shell Oil Products US lubricants organization and will be based in Houston.
The Pennzoil-Quaker State board has approved the acquisition. Closing remains subject to approval by stockholders and regulatory reviews. The transaction is expected to be completed in the second half of 2002 and is expected to be accretive to Shell's earnings and cash flow from the first full year after completion.
Paul Skinner, managing director of Royal Dutch/Shell and CEO of the group's oil products business, said late Monday, "The combination of Shell and Pennzoil-Quaker State Co., the largest independent lubricants company in the world, will make Shell a leader in the US and global lubricants markets."
Deal's benefits
Royal Dutch/Shell had indicated it was looking for an acquisition, but the market expectation was that it would be in the exploration and production segment, said Tyler Dann, analyst with Banc of America Securities (OGJ Online, Dec. 17, 2001).
"Our analysis indicates Shell can justify the premium that they paid for Pennzoil-Quaker," he added.
"It's a nice tuck-in acquisition in the US," Dann said, noting that Shell had an 18-month nonexclusive right to the Havoline lubricants brand after the merger of Chevron Corp. and Texaco Inc. forced the sale of some of Texaco's downstream assets to comply with federal antitrust rules.
Shell last year bought Texaco's share of Equilon Enterprises LLC, while Shell and Saudi Refining Inc. bought Texaco's share of Motiva Enterprises LLC (OGJ Online, Oct. 9, 2001). As a result of those transactions, Shell now owns a 100% interest in Equilon, and Shell and SRI now each own a 50% interest in Motiva.
Motiva refines 800,000 b/d of crude at four refineries and markets branded products through a network of products terminals and nearly 4,800 Shell-branded gasoline stations and almost 8,200 Texaco-branded stations. In July 1998, Shell's eastern and Gulf Coast refining and marketing businesses were combined with similar operations owned by Star Enterprise, a joint venture of Texaco and SRI, through the formation of Motiva.
Equilon operates primarily in the western US and has almost 4,500 Shell-branded gasoline stations and nearly 4,500 Texaco-branded gasoline stations, four refineries, a lubricants business, and an extensive pipeline and terminal network. Equilon was formed in January 1998, when Shell's western and midwestern refining, marketing, trading, transportation, and lubricants businesses were combined with similar operations of Texaco.
Fitch Ratings placed Pennzoil-Quaker State BB+ rated senior secured notes and secured bank revolver as well as its B- rated senior unsecured note on rating watch
positive following the Shell-Pennozil Quaker State announcement.
Fitch rates Royal Dutch/Shell Group's long-term debt at AAA and its commercial paper at F1+. The rating outlook on Royal Dutch/Shell Group is stable.
Moody's Investors Service placed the ratings of Pennzoil-Quaker State under review for possible upgrade
Rob Routs, president and CEO of Shell Oil Products US, said the addition of Pennzoil and Quaker State brands of US passenger car motor oil "will ultimately more than replace our use of the Havoline brand and complement Shell's brand strength in diesel engine lubricants."
He also said combining Shell's networks and infrastructure and Pennzoil-Quaker State's oil brands and other businesses, including its network of more than 2,000 Jiffy Lube stores, will position Shell as a leader in the US lubricants and car care business.
Routs pegged pretax benefits from the transaction at $140 million/year by 2004 and costs related to the transaction and to achieving the pretax benefits at $100 million.
Pennzoil-Quaker State CEO Jim Postl said, "Pennzoil-Quaker State will benefit significantly from being part of an enterprise with the geographic scope, operational scale, breadth of products and services, and financial resources necessary to compete in a consolidating industry. This transaction makes the combined Shell and Pennzoil-Quaker State Co. a stronger competitor in the lubricants and car care industry."
Pennzoil Co. and Quaker State merged 4 years ago (OGJ, Apr. 20, 1998, Newsletter), and the upstream portion of Pennzoil changed its name to PennzEnergy (OGJ, Jan. 11, 1999, p. 38). Devon Energy Co. and PennzEnergy merged a year later (OGJ, May 24, 1999, Newsletter).
