Elf gets worst of both worlds in two European takeover battles

How Elf has recently got caught up in two takeover bids, and how goverments rather than markets are the key drivers behind both.

Two takeover battles, one only just finished and one just begun this week, are convincing evidence that the concept of the free market economy has not quite caught on fully in Europe.

Elf Aquitaine SA found itself at the sharp end of the stick in both cases: first the battle for Norway`s Saga Petroleum AS, in which state-dominated companies won out; and latterly an attempt by Total Fina SA to take over Elf, again with state interests playing a key role.

The saga of the Saga takeover attempt was curious in a way: given the Oslo government`s long history of keeping firm control of its oil industry, it was quite surprising that Elf should expend the energy to even attempt to win Saga.

Norsk Hydro AS beat off Elf, which made an all-cash offer for Saga of 125 kroner/share ($15.94/share), with an offer of 135 kroner/share ($17.22/share), comprising one Hydro share for every three Saga shares plus the remainder in cash.

Despite Hydro not actually declaring any details of its own bid until after Elf had said its own offer was final, Saga rapidly decided that the Hydro offer was the best.

But the acceptance of Hydro`s offer followed a convoluted takeover battle, in which state firm Statoil AS thrashed out a deal with Hydro - itself owned 51% by the state - which would enable Hydro to take control of Saga provided Statoil was given 25% of Saga`s assets in the process.

Saga Chairman Wilhelm Wilhelmsen stomped off into retirement in protest at what he called moves to nationalize the company. His frustration was a result of the decision by the Oslo parliament that the state should maintain a majority shareholding in Hydro after the Saga takeover.

A Ministry of Petroleum & Energy official said the government had not interfered in Saga`s decision to opt for Hydro, but had merely cleared the Hydro/Statoil agreement behind Hydro`s bid: "The ministry was only pleased that a realistic Norwegian alternative was put forward." Quite.

Barely had Elf dried its eyes over the Saga saga than TotalFina made a 42 billion euros ($41.2 billion) bid for Elf. A merger of Total and Elf has been speculated about frequently over the past 18 months, but previously Elf Chairman and CEO Phillippe Jaffre has denied any interest in such a move.

And in this case too the unsubtle hand of state intervention was evident. Even as news of the bid was still spreading, 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 government (which as it later turned out would never be forthcoming) before it could make a counter-bid.

When government sold its shares in Elf in the mid-90s, it had included a "golden share" stipulation in the sell-off conditions, which was put in place to prevent any company building a stake larger than 10%. To Elf`s dismay, the government told TotalFina that the golden share obstacle would be lifted to facilitate the takeover.

A TotalFina official said 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 1-2 months."

An Elf official said that the offer from TotalFina had not been discussed with or studied by Elf`s management, and was therefore being considered as hostile.

The official said that the 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. The board was expected to meet at Elf`s Paris headquarters on July 8, though it was unclear whether or not Jaffre had a specific defensive strategy to present to the board.

One move which Elf is widely anticipated to make is the sale of a 35% interest in the Sanofi/Synthelabo pharmaceuticals, which is worth 10.3 billion euros ($10.1 billion). That this is not realistically a core asset for Elf is suggested by the fact that TotalFina has said that it would immediately dispose of as much of Sanofi/Sythelabo as it could.

Under the JV deal agreed with partner L`Oreal, Elf is free to dispose of 16% of its interest in Sanofi/Synthelabo, but it has an undertaking not to dispose of its remaining 19.5% without the permission of its partner.

However, this condition apparently becomes void if Elf is subject to a hostile bid. One option for Elf would be to volunteer the sale of the stake to raise cash for an attempt to escape TotalFina`s clutches.

One idea being touted is that Elf might try to free up the Sanofi/Synthelabo capital to make its own takeover bid for a smaller company still, in a bid to force TotalFina to up its own offer.

This speculation is likely to prove a tad fanciful, particularly given the French government`s implicit willingness to see the merger through, backed by an apparent market agreement that the bid was based on sound principles.

Jeremy Elden, global head of oil and gas research at Commerzbank, London, said 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."

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.

Wood Mackenzie Consultants Ltd., Edinburgh, said: "TotalFina has taken advantage of a window of opportunity, which has arisen from market conditions and a shift in French government policy that has given tacit support for the bid.

"The remaining question is whether a foreign bidder will be prepared to test the French government and take on the challenges of the cultural issues of incorporating Elf."

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