Arco to Go Public With Half of Lyondell Unit

Times Staff Writer

Atlantic Richfield, a favorite of Wall Street these days because of strong profits and efforts to boost the price of its stock, said Tuesday that it hopes to raise $1.56 billion by selling at least half of its petrochemical subsidiary to the public.

If Arco gets its price, the sale of 40 million shares of Lyondell Petrochemical Co. stands to be the biggest public offering ever for an industrial firm, surpassing a $1.37-billion offering last June by Occidental Petroleum.

As expected, Arco said it might use part of the proceeds to expand its stock buyback program. The company has repurchased 62 million shares in the past three years, reducing the number of outstanding shares by about one-fourth. Arco paid an average of $63 for the shares.

Though Arco shares are selling well above that mark now, they have dwindled from $82 since the company announced last month that it was considering the sale of shares in Lyondell. Arco closed down 12.5 cents at $78.25 a share Tuesday on the New York Stock Exchange.


Analyst Joel Fisher, who follows Arco for Drexel Burnham Lambert in New York, said the market has reacted negatively because the partial loss of Lyondell profits from Arco financial results will probably depress per-share earnings for now despite any stock buyback.

Fisher estimated that even if Arco repurchased 20 million shares with proceeds from the Lyondell deal, the net effect could be to reduce the company’s 1989 earnings by 40 cents a share to $8.10. But he said it might be smart to unload Lyondell before the petrochemical boom ends.

“I think it’s a good move,” Fisher said. “The argument would be that the earnings will be of higher quality. Short term, there is a penalty. In the long run, they might turn out to be brilliant.”

The initial public offering announced Tuesday was along the lines Arco disclosed Oct. 24 when it said it was considering the sale of shares in Lyondell, a subsidiary that makes ethylene, propylene, methanol and gasoline in Houston and Channelview, Tex.


Created from existing Arco operating units when the company restructured itself in 1985, Lyondell has ridden a strong petrochemical market to become a big contributor to the company’s bottom line. Its nine-month earnings of $386 million compare to Arco’s income of $1.2 billion.

The company said it estimates that the public offering will fetch $30 to $34 per share.

The 40 million shares offered to the public include 8 million to be offered outside the United States. The sale of 40 million shares would leave Arco with 50% ownership of Lyondell.

Arco said it also granted over-allotment options for 6 million shares to the underwriters. If fully subscribed, the oil and gas company would hold 42.5% of Lyondell. Goldman Sachs and Salomon Bros. are co-managing the sale here and abroad.

Part of the transaction also calls for Lyondell to borrow $500 million, which it will pay to Arco as a dividend directly.

The debt would be solely Lyondell’s obligation, bringing to about $2 billion the sum that Arco could realize on a pretax basis. However, company officials said taxes and expenses could wipe out 40% to 60% of the take.

In addition to the possible repurchase of more shares, Arco said it might use some proceeds to buy back enough Lyondell shares to keep its ownership of the firm closer to 50%. It would not comment on other possible uses for the money.

However, analysts speculated that the company might buy more oil and gas reserves, as it has recently done in California and Britain’s North Sea through the purchase of Tenneco Inc. properties and the acquisition of a British oil and gas firm.