Unocal Subject of Takeover Rumor : Talk of Possible Bid by Standard Oil Spurs Stock Price
Eighteen months after Unocal spurned Texas oilman T. Boone Pickens Jr. in a protracted takeover battle, the parent company of Union Oil of California was again the subject of merger speculation Tuesday. This time, the rumored suitor is Standard Oil.
Unocal’s stock soared $1.75 a share to $26.875 on Tuesday in unusually heavy trading on the New York Stock Exchange amid rumors that the Cleveland-based oil company is preparing to make a friendly takeover offer. More than 1.47 million shares were traded, making Unocal the Big Board’s seventh most active issue.
Citing company policies against commenting on rumors, neither oil company would comment directly on the speculation. Standard Oil spokesman John Andes did acknowledge, however, that “we’re looking for acquisitions, and a West Coast acquisition would be helpful.”
Several oil industry executives and securities analysts contacted Tuesday did characterize Los Angeles-based Unocal as a “good fit” for Standard Oil--a description that some former and current Standard Oil executives have themselves used in discussions with other industry officials in recent years. The company, formerly known as Sohio and 55% owned by British Petroleum, has most of its oil and gas reserves in Alaska’s Prudhoe Bay and has stated publicly that it wants reserves in the Lower 48 states, which is where the bulk of Unocal’s reserves are located.
Unocal also has substantial natural gas reserves and some foreign exploration operations, both of which Standard Oil lacks and is actively seeking, the company has told analysts recently.
Nonetheless, these analysts and industry executives consider a Unocal-Standard Oil merger a long shot.
“The bottom line is I don’t believe that (Unocal Chief Executive) Fred Hartley is ready to sell his company despite the fact that he turns 70 in January,” said Thomas C. Lewis, a longtime Standard Oil watcher and an analyst with Duff & Phelps in Chicago. “And I don’t think Standard Oil wants to get involved in a hostile takeover.”
Increased Debt Load
Elaborating, Lewis said that for Hartley to sell the company now would “go against everything Fred did to save it from Pickens. He loaded it up with debt and said he wouldn’t carve it up, and a sale or merger now would be saying ‘Hey, maybe we screwed up.’ ”
To fight off Pickens, Unocal increased its debt load to more than $5 billion, a whopping 70% of its net worth.
Tuesday’s rumors were fueled largely by a Standard Oil announcement that it had obtained $5.5 billion in new financing and that, for the first time in its history, it had agreed to uncommitted lines of credit in order to enjoy “greater financial flexibility and greater financial security.”
Many analysts noted that companies don’t often differentiate between committed and uncommitted financing. And they suggested that Standard Oil’s disclosure that only $2 billion of the credit has been firmly committed is a tip-off that the company doesn’t intend to take on either Unocal or USX, also mentioned Tuesday as a possible target of Standard Oil. (“Committed” funds are those for which a fee has been paid to the bank and an interest rate has been set.)
USX, formerly U.S. Steel, is trying to fend off yet another suitor, takeover artist Carl C. Icahn. Besides its steel operations, USX owns Marathon Oil and Texas Oil & Gas, both of which have good industry track records.
Standard Oil, which currently has a debt-to-equity ratio of about 32%, has told analysts that it could live with a 45% debt ratio. And analysts say an acquisition of either Unocal or USX would cost Standard Oil about $3 billion and raise its debt ratio roughly to 45%.
But few expect Standard Oil--which has just completed a restructuring and says it is “at a watershed”--to buy an entire company. Rather, they expect it to buy select operations from several companies--something the company itself hinted at Tuesday.
“We are in the market for distressed properties in the oil and gas industry,” spokesman Andes said.
