Asset sales key to oil merger approval

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Series Details Vol 5, No.28, 15.7.99, p22
Publication Date 15/07/1999
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Date: 15/07/1999

By Renée Cordes

ANALYSTS are predicting that French-Belgian oil giant Total Fina will be forced to trim down its refining activities in France if its unsolicited 54-billion euro offer for French rival Elf Aquitaine is accepted.

Total Fina, which itself was formed from a takeover by French oil company Total of Belgian oil and petrochemicals company PetroFina just a few months ago, caught top company executives by surprise when it launched its bid for Elf last week.

Elf's chief executive Philippe Jaffre immediately denounced the offer as "hostile" and predicted that the bid would fail. He said that the merger would create an overlap in exploration and production activities and overcapacity in refining, and insisted the inevitable sell-off of combined chemical assets rendered the attempted take-over premature.

Jaffre said he would ensure that a strategy was put in place for responding to the offer before convening the company's board to discuss the proposal.

Industry experts are nevertheless putting their money on the offer being accepted, arguing that the firms are a perfect match geographically. However, they predict that some concessions will have to be made in order to secure approval from EU competition authorities.

"It seems that there could be some overlap pro-blems, but just in France," said Laurent Jouret, an analyst at Bonne-wijn, Renwart & Cie, who pointed out that the merged company would become France's largest in refining and other upstream activities.

Downstream activities such as exploration and production are not expected to pose a problem, as the merged entity would have no more than a 12% share of the European market.

European Commission competition officials are refusing to comment on the proposed merger until it has been officially notified to the institution.

But analysts say that once the French interests are sold, the two companies will be able to combine their know-how in deep-water oil production and complement one another's activities geographically. Elf is especially strong in Asia and eastern Europe, while Total Fina is more active in the Middle East, with considerable reserves in Asia and South America.

The offer comes less than a month after Elf's bid for Norwegian oil group Saga was rejected. The deal would be the latest link-up among the world's largest oil companies, which are increasingly forming cross-border mergers to save labour and investment costs as they struggle to recover from a two-year world oil-price slump.

Total Fina says the merger would mean the loss of 4,000 jobs, of which about half would come from France, cutting costs by 1.22 billion euro a year, although analysts suggest this is a conservative estimate.

With annual production of 2.1 million barrels a day and reserves of 9.6 billion barrels oil equivalent, the combined firm would become the world's fourth largest oil group after Exxon-Mobil of the US, Anglo-Dutch group Shell and BP-Amoco-Arco.

"I believe it is necessary today to join forces to assure continued solid growth and to take our place as an oil major of the first rank at a time when the industry is restructuring on a global scale," said Total Fina's chairman Thierry Desmarest when he announced the bid.

Elf hit back immediately, accusing Total Fina of trying to "take possession of Elf by force and impose an industrial project that is not [Elf's]".

However, the French government said it would not use its right of veto, or 'golden share', to prevent Total Fina from acquiring more than 10% of Elf's capital or voting rights. A Commission spokeswoman also confirmed that the institution would oppose any attempt by Paris to use its golden share to veto the deal.

Total Fina's bid has yet to be approved by French stock market regulators and the US Securities and Exchange Commission, whose clearance is needed because both firms' shares also trade in the US. French regulators have to approve the transfer of Elf's mining rights as well as its refinery and bank assets.

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