This should help the Dow a little longer
Chevron in Talks to Acquire Texaco
May 10, 1999
By Anita Raghavan, Steve Liesman and Christopher Cooper
Wall Street Journal Staff Reporters
Chevron Corp. is in talks to acquire Texaco Inc. in a stock deal valued at roughly $80 a share, or
about $42 billion, people familiar with the situation say, in a combination that would unite the
nation's third-and fourth-largest energy companies.
The two companies aren't near an agreement and a possible deal faces enormous hurdles
because of Texaco's U.S.-refining joint ventures, these people say. Still, such an acquisition
would mean almost a complete overhaul of the U.S. oil industry within the past 12 months.
Prodded by sliding oil prices and the need to slash costs to compete in a truly global market,
large oil companies have been rushing to combine. Shareholders of Exxon Corp., the largest
U.S. energy company, and Mobil Corp., No. 2, are set to vote later this month on their
transaction. Last year, British Petroleum acquired Amoco Corp., then the fifth-largest concern.
Then, just last month, the new BP Amoco PLC agreed to buy No. 6, Atlantic Richfield Co.
Kenneth T. Derr, Chevron's 62-year-old chairman and chief executive, and Peter I. Bijur, Texaco's
57-year-old CEO, have both said in recent speeches that they don't need a partner to be
successful. But they also have said they would consider a merger with another company if the
deal adds to cash flow or makes them much more efficient.
Neither Chevron, based in San Francisco, nor Texaco, based in White Plains, N.Y., would
comment.
To analysts, a Chevron-Texaco marriage makes less sense than the other megaoil mergers in
the past year. Both companies have been actively slashing costs on their own, and Texaco last
year formed an extensive refining alliance with Shell Oil Co., the U.S. unit of the AngloDutch
consortium Royal Dutch/Shell Group, that raises both regulatory and economic stumbling blocks
for a potential Chevron-Texaco merger.
Through two U.S. ventures, Texaco and Shell control about 15% of the U.S. domestic gasoline
market. Analysts say that unwinding those ventures, or working around them, could be quite
complicated and possibly costly. In addition, because Texaco already has combined its refining
business with Shell, there are fewer efficiencies and fewer cost-cutting moves for it to make.
Since 1936, Chevron and Texaco have operated a large refining venture called Caltex in Asia,
Africa and the Middle East.
"There are always redundancies that could be eliminated, but where I'm really scratching my
head on a potential merger is to understand if there really are substantial cost savings to be
achieved or if the talk of this merger is driven by just the desire to become bigger," said Michael
Young, oil analyst at Deutsche Bank Securities in Boston.
Texaco, for example, has pared down its overhead so sharply that it is now seeking a tenant for
40% of its corporate headquarters. Chevron, meanwhile, has said it will cuts costs by $500
million this year.
Texaco's U.S. downstream operations in the West and Midwest are run by Equilon Enterprises
LLC, 44% owned by Texaco and 56% owned by Shell. Motiva Enterprises handles the Gulf Coast
and Eastern operations and is about equally owned by Texaco, Saudi Refining Inc. and Shell.
Because Chevron is dominant in the West Coast retail market, with about a 20% share, Texaco
would likely have to shed a big piece of its operation to meet federal antitrust approval, possibly
selling to its other partners at a discount. Texaco would have to mount a similar fire sale in the
East, as Chevron is also a strong market player along the Gulf Coast.
The Federal Trade Commission has been particularly concerned about gasoline-station
concentrations in recent oil mergers and recently said it would look into a huge jump in gasoline
prices on the West Coast, triggered by refinery shutdowns and fires.
A senior Texaco executive agreed with the concerns of analysts. "All of that makes sense," the
executive said.
Largely because of its ventures, Texaco's retail operations are among the most profitable. By
contrast, Chevron, with 8,000 U.S. gas stations, has seen its refining and marketing business
flag in recent years. In fact, about two years ago, Chevron's Mr. Derr hinted he might give up the
business if he couldn't get it to perform better. Since then, Chevron has managed to cut costs
and accident rates at its refineries, and profit has rebounded somewhat.
Analysts say the price under discussion is in line with premiums paid in other in oil transactions.
At $80 a share, Chevron would be paying a 19% premium over Texaco's closing price of $67.25
on Friday, a day when Texaco's shares surged $5.0625, or about 8%, on rumors that the two
companies were in talks. Chevron closed Friday at $94.875, down $2.9375.
In some ways, a Chevron-Texaco merger is complementary. Chevron has a commanding
presence in oil-exploration regions, including West Africa, the Caspian Sea region and Australia.
In the Caspian Sea region, Chevron operates the giant Tengiz oil field, which, because of
transportation problems, turns only a modest profit. But with construction of a pipeline to the field
slated to begin this year, Tengiz potentially could be one of the most productive fields in the
world.
Domestically, Chevron is one of the top leaseholders in the Gulf of Mexico, considered the last
productive region in the U.S.
Texaco's exploration business, by contrast, has been disappointing. In 1997, the company paid a
39% premium to purchase Monterrey Resources, a California-based heavy-oil producer, for about
$1.1 billion in stock in what has proved to be an expensive acquisition.
One attraction of merging exploration and production businesses is the ability to keep the cream
of the prospects and get rid of underperforming oil and natural-gas fields, improving overall
returns.
Even so, the two apparently have a way to go before any deal is made. For example, Franklyn G.
Jenifer, a member of the Texaco board, said he was unaware of merger talks and added, "I have
not been called to any meetings." |
