TotalFina take-over of Elf set to be cleared

Date: 03/02/2000

By Renée Cordes

THE European Commission is set to approve TotalFina's plans to take over Elf Aquitaine, following promises from the companies to sell off a number of French assets.

Analysts and industry insiders predict that the EU executive will give the two firms the green light to form the world's fourth largest oil company - the latest tie-up in a sector which is consolidating at lightning speed - next Wednesday (9 February).

TotalFina won 94.93% of Elf in a bitter take-over battle last summer which saw Elf accusing its rival of trying to "take possession" of it by force. The Commission launched an in-depth investigation into the deal in October, citing concerns that it could hamper competition in France.

Earlier this month, TotalFina offered to sell off several of its holdings, including 70 service stations owned by both itself and Elf located along French highways, interests in oil pipelines and finished-product storage depots, and to relinquish its dominance of the jet fuel-supply infrastructure for Lyon and Toulouse airports.

TotalFina chairman Thierry Desmarest said after a meeting with Competition Commissioner Mario Monti early this year that these concessions appeared to have satisfied the institution's regulatory watchdogs, but Commission officials are refusing to discuss details of the case until after a formal decision has been reached.

"The management seemed to be quite confident of securing approval when they released their annual earnings," said Irene Himona, an analyst at ABN Amro. "They are offering to give up around 38% of their petrol stations in France, which is quite a bit."

But some experts believe that the Commission could impose additional conditions on the companies on top of the concessions already promised. "It will be more a question of who will buy the assets which are being sold," said J.J. Traynor, an analyst at Deutsche Bank in Edinburgh. "There may be some requirements on the timeline of when they can sell the assets or who the acquiring company will be."

Some analysts also predict that TotalFina could also be required to give up some of its Spanish holdings.

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

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

Analysts say once the French interests have been sold, the two companies will be able to combine their know-how in deep-water production and complement one another's activities geographically. Elf is particularly strong in Asia and eastern Europe, while TotalFina is more active in the Middle East and has considerable reserves in Asia and South America.

The companies say they expect the new group's net profit to grow by about 20% annual over the next few years and anticipate making €1.5 billion in savings by 2002. TotalFina said the merger would result in the loss of 4,000 jobs - about half of which would be in France - cutting costs by €1.22 billion a year, although experts suggest this is a conservative estimate.

Separately, Elf has threatened to mount a legal challenge against the Commission if the EU executive demands that state aid paid by the German government to the company's Leuna refinery in eastern Germany should be paid back.

Former German Chancellor Helmut Kohl and his aides have denied taking bribes to sell the plant, and Kohl has also denied an allegation that Elf contributed millions of euro to his 1994 re-election campaign at the request of the late French President François Mitterand.

German and French television networks have reported that Mitterand directed formerly state-owned Elf to channel more than €15 million in secret funds to Kohl's campaign fund in connection with the sale. Kohl's spokesman said the reports were "pure fiction". Analysts do not expect the case to have any impact on the merged firm.