Analysts’ View : Arco Can’t Lose in Battle With BP for Britoil
If their jet has a catbird seat, Atlantic Richfield executives could be excused for sitting in it Wednesday as they flew home to Los Angeles from London after buying a big chunk of Britoil, a large North Sea oil producer, and touching off a battle with British Petroleum.
Confusion still surrounds the British government’s ground rules for the battle, and there is skepticism in London about Arco’s true intentions. But analysts say that if nothing else, the U.S. company should turn a tidy trading profit.
After British Petroleum announced a takeover offer for Britoil on Dec. 8, Arco moved quietly to accumulate a substantial interest in the stock. Then the Los Angeles company announced plans to buy up to 49%, with Britoil’s blessing.
Now, with Arco having bought about 100 million shares of Britoil since Dec. 9 at less than $7 apiece, it could throw in the towel and take the sweetened $8.10-per-share offer since placed on the table by British Petroleum.
“If they come out $50 million or $100 million ahead, it’s worth it,” says Jack N. Aydin, a New York-based oil industry analyst for McDonald & Co.
That would be the least complicated alternative for Arco in what has become a multidimensional chess game among Arco, British Petroleum and Britoil, with the United Kingdom an active player and the government of Kuwait stalking the sidelines. At stake is control over more than a billion barrels of crude oil in Britain’s North Sea and, potentially, Alaska.
Picture Muddy
While Arco said it is keeping “a continuing presence in London,” a spokesman said some of its negotiators returned home late Wednesday. The company is “evaluating all our options” after a quasi-public committee in Britain on Wednesday waived a key restriction on takeovers and mergers. The action cleared the way for British Petroleum to proceed with its offer.
However, the picture remained muddy because the British Treasury immediately reiterated its intention to use its so-called golden share in Britoil to prevent any bidder from gaining control of Britoil’s board.
Even if a bidder gained control of 100% of Britoil’s common shares, the special share--a vestige of the company’s former ownership by the government--allows the Treasury to outvote all other shareholders at a general meeting on any resolution.
The seemingly contradictory positions staked by the government and the British panel on takeovers and mergers left unanswered the question of who the Britoil board would answer to--the company’s owners or the government.
“It’s very messy,” said an analyst for a leading London brokerage involved in the deal. “BP believes it has spotted a loophole in the takeover laws and is exploiting it.”
Britoil urged its shareholders Wednesday to take no action on BP’s offer for the 70.1% of the company’s shares it doesn’t already own, but Chief Executive David Walker said he was “pleased that at least one of the uncertainties surrounding the BP offer has now been removed.”
In addition to the financial stakes, the fight has strong political overtones in the United Kingdom as well. Headquartered in Glasgow, Scotland, Britoil is a major employer of Scots. A takeover by BP is seen as threatening the loss of jobs to London.
If BP had a moment Wednesday to look over its shoulder, meanwhile, it would have noticed that the government of Kuwait--one of the Middle East’s biggest oil producers and now a major European marketer of gasoline--moved to boost its stake in BP to about 17.1%. The Kuwait Investment Office has insisted that its stake is only for investment purposes.
But that appears to be another story. The battle over Britoil began Dec. 8, when BP--the world’s third-biggest energy company since completing its acquisition of Cleveland-based Standard Oil this year--began buying shares of Britoil. Arco moved in as an apparent “white knight,” upping the ante.
Today, BP holds 29.9% and seeks 100% of the Britoil shares. Arco has 20.4% and says it wants 49.9%. Arco won’t say what it has committed so far, but the sum is believed to approach $700 million.
In Arco and BP, the competition is between the two largest players on Alaska’s North Slope, where the biggest field is due to enter its natural decline in production within two or three years. Three-fourths of Arco’s crude oil and about half of that controlled by BP comes from Alaska.
The prize, Britoil, is the former British National Oil Co. which Margaret Thatcher’s Conservative government privatized in the early 1980s. It was the entity through which the Labor government established an ownership stake in Britain’s North Sea oil fields when the reserves were discovered in the 1960s and 1970s.
Today, Britoil has oil and gas reserves estimated at the equivalent of 1.2 billion barrels of crude oil--nearly all of it in the North Sea. In the hands of Arco or BP, those holdings would nicely offset the decline of the Alaskan fields.
Its critics say the North Sea reserves are about all the company has to offer. Exploration efforts elsewhere in the world have had little success, and the value of Britoil shares had fallen to about $3.20 early this month from the $3.60 at the time the government spun it off.
That made it a bargain, and even after the forays by BP and Arco drove the trading price above $7--an all-time high--it represents a cheap way to acquire oil. It is the equivalent of $3.50 per barrel, according to one study.
In Arco’s case, the addition of the North Sea holdings would begin to correct what is viewed as an excessive reliance on U.S. reserves. It is generally cheaper to look for oil overseas, and the industry holds limited hope of finding more domestic fields to rival Alaska’s Prudhoe Bay. With pipelines and other support facilities in place, the development of new reserves in the North Sea can proceed at today’s oil prices or less.
“Arco has to do something with all its cash,” said analyst Stephen A. Smith of Bear, Stearns in New York, referring to its $3.5 billion of cash on hand. “Finding oil in the United States is not much of a picnic. The tendency in the industry is to move internationally, where the finding costs are less.”
But it’s “ironic,” said analyst Aydin, that Alaska’s two leading producers facing identical problems should all at once look to the same target as a means of stemming a decline in oil reserves.
And the London-based analyst says there is doubt in Britain about Arco’s financial ability to acquire Britoil, despite all that cash.
“The view in London is that what Arco is really trying to do is a deal with BP in Alaska,” this analyst said. “The view is that Arco is not financially strong enough to take over all of Britoil.”
If that is the hometown view, there is a U.S. version. A New York analyst for an investment firm with close ties to Arco sniffs: “Those British analysts obviously don’t know what they’re talking about. Anyone who has looked at Arco and its financial position would know that the company has the ability to acquire about five Britoils if it wanted to.”
