Elf Aquitaine submits to TotalFina takeover bid

Sept. 20, 1999
France's warring major oil companies, Elf Aquitaine and TotalFina SA, made peace Sept. 13, following a 2-month mutual takeover battle.

France's warring major oil companies, Elf Aquitaine and TotalFina SA, made peace Sept. 13, following a 2-month mutual takeover battle.

Elf Chairman and CEO Philippe Jaffré made a determined, but ultimately futile, attempt to ward off TotalFina's unsolicited bid for his company, launched by TotalFina Chairman and CEO Thierry Desmarest on July 5 (OGJ, July 12, 1999, p. 22).

In the end, TotalFina improved on its initial terms, eventually offering Elf shareholders 19 TotalFina shares for 13 of Elf's vs. an original ratio of 4 TotalFina for 3 Elf. This sweetening of the deal amounts to a premium of 26% over Elf's market value, compared with 15% initially, based on the closing price July 2, the last trading before TotalFina initiated its offer.

Desmarest says these terms are "favorable" for Elf shareholders and "reasonable" for TotalFina's. The deal values Elf at 52 billion euros.

The agreement gives birth to a new group that will be the world's fourth largest oil company, with a market capitalization of nearly 100 billion euros, sales of 66 billion euros, and a workforce of around 150,000.

How it played out

What was shaping up to be an extended battle between two powerful men and two rival French companies, each clinging proudly to its image and history, was suddenly resolved Sept. 10 with the help of a go-between, former CEO and chairman of Air Liquide, Edouard de Royère, who is chairman of France's national association of limited companies (sociétés anonymes). He is a respected and experienced industry personality, and Desmarest paid homage to his intervention, as well as to the subsequent help of four Elf and TotalFina board members in winding up the friendly deal.

Judging from his mood at a Paris press conference Sept. 13, Jaffré gave in with unexpected grace, given the tenacity he displayed in launching a counteroffer for the larger TotalFina after Desmarest initiated his takeover bid.

Although Jaffré will retire in mid-October, when the merger is expected to be concluded, he has obtained what he claims were his three main purposes in fighting the merger: increasing Elf's shareholder value, obtaining an equitable sharing of the management posts between Elf and TotalFina, and gaining acceptance of an industrial project for the chemicals division.

TotalFina organization

Echoing Jaffré's assertion, Desmarest, who will be chairman and CEO of the new group, promised to make it a "balanced organization" with parity in the executive management. Besides the chairman, the board of directors will include nine directors from the Elf board, nine directors from the TotalFina board, and four that currently represent the Belgian shareholders on the TotalFina board.

Organized by operating segments, the new group, when formed, will establish a nine-member executive committee. In addition to Desmarest as its president, the committee will include four TotalFina members and four Elf members.

There will reportedly be two vice-presidents: TotalFina Vice-Pres. in charge of chemicals, François Cornélis; and Elf Atochem Pres. Jacques Puéchal.

Other reported changes include: Christophe de Margerie, head of TotalFina's exploration and production division, will become deputy general manager; Jean-Luc Vermeulen, Elf's E&P manager, will hold the same job in the merged group; Jean-Paul Vettier, manager of TotalFina's refining and distribution business, will retain his post in the new TotalFina; and Vettier's counterpart at Elf, Bernard Polge de Combret, will be in charge of trading and the downstream gas sector.


Less clear is the structure of the "industrial project" for the chemicals business, which was the main contention between the companies and the only difference in their merger strategies.

Chemicals will clearly remain within the group and not be spun off, as Jaffré wanted. But Desmarest indicated, possibly as a face-saver for Jaffré, that a think-tank would be set up to sort out the different parts of what will now be a complex chemicals division. This would herald a specific industrial strategy for chemicals, he said.

The new group's chemicals would include "the high-quality petrochemicals of Petrofina, TotalFina's strongly growing specialty chemicals business, and Elf Atochem's more-complex chemicals, which comprise petrochemicals, commodities, intermediates, and specialties," said Desmarest. Overall, the division would have sales of 16.3 billion euros and a workforce of 75,000, and its strategy would be geared toward strong growth.

Desmarest insists that integration is needed to draw the maximum synergies from refining and petrochemicals, as well as from petrochemicals and downstream chemicals. He confirmed the figure of 6 billion euros in divestments from this area, of which 4 billion will come from the offloading of a 15% stake in Elf's Sanofi unit (OGJ, Sept. 6, 1999, Newsletter).

Merger benefits

Concerning the full synergies to be drawn from the TotalFina-Elf merger, Desmarest is confident they will be increased from his initial figure of 1.2 billion euros to 1.5 billion/year until 2002. He also said the merger would have a 2% positive impact on the cash flow per share the first year, 2% on profits per share the second year, and 6% on cash flow and profits per share the third year.

He said hydrocarbon production would increase by 40% during 1998-2005-twice the rate of the other majors.

Desmarest also confirmed, however, that there would be 4,000 job cuts over the next 3 years: 2,000 in France and 2,000 abroad, with headquarters mainly involved, as well as the management of the different divisions.

These layoffs will be carried out through natural attrition and early retirement, Desmarest insists. This is one point that is worrying both the French government and trade unions, which are otherwise pleased that a friendly merger finally has been achieved. The refining and chemical sectors are expected to be the hardest hit, according to the trade unions.

As for the government, it said it would "remain particularly attentive to the social conditions of the operations."

Although Jaffré said he believes that, given more time, he would have succeeded in his counter-offer on TotalFina (and he did try to gain time through litigation tactics), the market had consistently been in favor of TotalFina's simpler plan and had not believed in Jaffré's strategy of separating the chemicals business from the new group. And this was the case despite Jaffré's many encounters with investors, his suggestion of a "super dividend" for Elf shareholders (OGJ, Sept. 13, 1999, Newsletter), and his threats of bringing in a so-called "white knight" to rescue Elf from TotalFina's grasp.

Paris's support of TotalFina's exchange offer had, from the start, put him at a disadvantage, with its waving of the golden share to dissuade any foreign company from intruding.

But now that TotalFina is the winner, Jaffré told the French daily Le Monde that he is bullish about the new group. As for him, he did not consider he had failed, as the merger would be carried out on a "parity level, on the basis of an industrial project, and at a price corresponding to Elf's value. And this, thanks to our counter-offensive."

As for the future of the new TotalFina, Desmarest said he is open "to further acquisitions, providing the timetable is right and we find good partners."

Observers believe the first candidate could be Spain's Cepsa, in which Elf has a 45% stake-a very fruitful investment. Under Spanish stock-exchange rules, TotalFina must, within 6 months of completing its merger with Elf, either launch a takeover bid for Cepsa or reduce its stake to 25%. The first option is considered the most likely.

Meanwhile, Italian energy giant ENI has denied rumors that it is discussing a merger with TotalFina. In a press statement on Sept. 10, ENI said, "With reference to press articles published today about a merger between ENIellipseand TotalFina-Elf, ENI states that, since TotalFina's takeover bid for Elf, there have not been merger-related contacts with Elf, and never with TotalFina." n

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TotalFina Chairman and CEO Thierry Desmarest
TotalFina is open to further acquisitions, providing the timetable is right and we find good partners.

Click here to enlarge image

Elf Aquitaine Chairman and CEO Philippe Jaffré
The merger will be carried out on a parity level, on the basis of an industrial project, and at a price corresponding to Elf's value. And this, thanks to our counter-offensive.