Chevron To Buy Texaco for $35B

SAN FRANCISCO (AP) â€” Chevron Corp. is buying rival Texaco Inc. for $35 billion in a stock swap that will create the world's fourth-largest oil company. <br><br>The combined company will be called

Monday, October 16th 2000, 12:00 am

By: News On 6

SAN FRANCISCO (AP) â€” Chevron Corp. is buying rival Texaco Inc. for $35 billion in a stock swap that will create the world's fourth-largest oil company.

The combined company will be called ChevronTexaco Corp., and joins the ranks of other industry powerhouses formed by similar mergers: Exxon Mobil Corp., Royal Dutch/Shell Group and BP Amoco PLC.

The proposed marriage between the No. 2 and No. 3 U.S. oil companies comes against a backdrop of record oil industry profits and intensifying anxiety about rising gas prices. It will also result in an estimated 4,000 job cuts.

A combined Chevron and Texaco would have $66.5 billion in revenue, based on 1999 figures. Through the first half of 2000, the two companies earned a combined $3.4 billion.

To win government approval of the deal, ChevronTexaco will likely have to sell several U.S. refineries and hundreds of gas stations, particularly on the West Coast. Without divestitures, ChevronTexaco would control 40 percent of the West Coast retail market and one-third of the region's refinery capacity.

``There are going to be some considerable challenges to getting this deal done'' because of antitrust concerns, predicted Tyler Dann, an oil industry analyst with Banc of America Securities in Houston. ``They need to take a pre-emptive strike and sell assets to satisfy regulators as soon as possible or it could turn into a real political football.''

Fadel Gheit, an oil analyst with Fahnestock & Co. in New York, said the union between Chevron and Texaco shapes up as a more compatible match than some of the industry's other recent deals.

``This is the perfect merger,'' Gheit said. ``This is like two high school sweethearts getting together. This company won't be as big as some of the others, but pound for pound, it will be very competitive''

Even as San Francisco-based Chevron and White Plains, N.Y.-based Texaco competed against each other, the two companies have shared a business bond for decades. For the past 55 years, they have co-owned a joint venture called Caltex Corp., which sells 1.8 million barrels of crude oil and petroleum products per day and operates in 55 countries.

Chevron tried to buy Texaco last year, but those talks unraveled over disagreements about price and issues of control. Texaco CEO Peter Bijur reportedly wanted to run the combined company â€” a demand rejected by Chevron's then-CEO, the sometimes gruff Kenneth Derr.

After Derr retired at the end of 1999, David O'Reilly took over as Chevron's CEO, paving the way to reopen talks with Texaco. Texaco's stock also had been lackluster since breaking off its talks with Chevron in June 1999, putting Bijur under greater pressure to find a way to improve shareholder returns.

O'Reilly, 53, will be chairman and chief executive officer of ChevronTexaco, which will remain based in San Francisco. Bijur, 58, will be vice chairman.

Under terms of the deal, Chevron will exchange 0.77 of its shares for each Texaco share, roughly the same ratio that it offered Texaco in 1999. Based on Friday's closing price of Chevron's stock, the price translates into $64.87 â€” an 18 percent premium for Texaco shareholders. Chevron also will assume roughly $8 billion of Texaco's debt.

``This merger positions ChevronTexaco as a much stronger U.S.-based global energy producer better able to contribute to the nation's energy needs,'' said O'Reilly.

The deal closes the gap between the combined company and the largest U.S. oil company, Exxon Mobil Corp., which had 1999 sales of $160.9 billion. Chevron had 1999 sales of $31.5 billion, while Texaco had sales of $35 billion last year.

Some 4,000 jobs, or 7 percent of the 57,000 combined jobs at Chevron and Texaco, will be eliminated as a result of the deal, which will result in annual savings of $1.2 billion, the companies said.

If the savings are realized, analyst Gheit said they would boost ChevronTexaco's market value by $12 billion, based on recent price-to-earnings ratios paid for oil companies.

Chevron and Texaco still need to get approval from their respective shareholders as well as federal regulators.

To win shareholder approval, Texaco almost certainly will have to sell its 44 percent interest in a joint venture called Equilon Enterprises that it operates with Shell. Equilon runs three refineries in California, a state where Chevron also owns two refineries. Equilon also sells gas in hundreds of California gas stations under the Shell and Texaco brands.

All told, Equilon sells gas at 9,600 Shell and Texaco stations in 31 states. Chevron sells gas 7,900 stations, primarily in the West, Southwest and South.

Texaco and Shell also operate another joint venture called Motiva Enterprises that sells gas at 13,500 stations in 26 states and Washington D.C. Motiva's stations mostly operate in states where Chevron has little or no presence. Texaco and Shell each one one-third of Motiva. Star Enterprises, a joint venture between Texco and the Saudi Refining Co., own the remaining third of Motiva.

Motiva also operates four refineries in Lousiana, Delaware and Texas. Chevron also has a refinery in Texas, as well as one in Mississippi.

Analysts believe Texaco already has agreed to sell its stake in Equilon to Shell at a predetermined price. Shell confirmed Monday that it has entered into discussions about a restructuring of the Equilon and Motiva ventures, but declined to provide further details.

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On the Net:

http://www.texaco.com

http://www.chevron.com

http:://www.equilonmotivaequiva.com