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BP Amoco Will Acquire Arco for $27 Billion

TIMES STAFF WRITER

BP Amoco has agreed to buy Atlantic Richfield Co. in a stock swap worth about $27 billion that will fold the Los Angeles oil company into a new global energy giant capable of exploring all corners of the planet--but thousands of Arco employees probably will not be a part of it.

The two companies are expected to officially unveil the deal this morning in London.

If the transaction goes through, Arco, the seventh-largest U.S. oil company, would join an oil titan that was created only three months ago through the $48-billion marriage of British Petroleum of London with Amoco Corp. of Chicago. BP Amoco is the world’s third-largest publicly traded oil company.

Details of the agreement were not yet available, but analysts are estimating that BP Amoco will aim to cut $1 billion a year in costs, which could mean huge layoffs, perhaps 2,000 or more.

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Arco Chairman and Chief Executive Mike R. Bowlin is not expected to remain with the company.

Arco’s workers, who number 18,000 worldwide, can expect to suffer the same fate as the Amoco work force, which is bearing the brunt of the 10,000 job cuts resulting from that merger. In fact, BP Amoco Chief Executive John Browne has been likened to a neutron bomb for his cost-cutting zeal: Often called “Neutron John,” he gets rid of the people while preserving the hard assets.

The combination of Arco and BP Amoco has been hailed by energy experts as a near-perfect fit with only few areas of overlap to alarm regulators. Arco would bring BP Amoco a leading position in the huge and lucrative California gasoline market. Arco’s dowry includes oil fields in Alaska, where BP Amoco already is the dominant player, oil production in the Gulf of Mexico and natural gas fields in Asia.

“This is tremendous for BP Amoco,” said Fadel Gheit, an energy analyst with the Fahnestock & Co. investment firm in New York.

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“Arco’s motive is very simple. It’s almost like a shotgun wedding,” Gheit said. “Lower oil prices dealt Arco a tremendous blow.”

These mergers are part of an oil industry consolidation that is fed by the need to cut costs in the face of 18 months of rock-bottom oil prices brought about by overproduction and falling demand. Two of the largest deals occurred in December, with Exxon Corp. and Mobil Corp. announcing a $48-billion merger and French oil company Total agreeing to buy Belgian refiner Petrofina for $11.8 billion.

With Arco spoken for, other mid-sized oil companies become even more vulnerable. Companies such as San Francisco-based Chevron Corp., Texaco of White Plains, N.Y., and Unocal Corp. and Occidental Petroleum Corp., both of Southern California, could be next, analysts say.

Although rumored for months, the sale of Arco is surprising in light of Bowlin’s repeated insistence that the company was intent on staying independent.

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To that end, Arco launched a restructuring in October with the aim of slashing $500 million in costs through layoffs (eventually reaching 1,200), the closure of 20 foreign offices, the sale of corporate jets and a move out of its Arco Tower home. The company had been based there since 1972, when it relocated to Los Angeles from New York. Headquarters is now at the downtown Hope Street building that houses its Arco Products subsidiary.

What the proposed merger would mean at the gas pump is unclear.

Because of Arco’s strong market share--about 20% of the California market where it has 1,200 service stations--the Arco name might be expected to survive on its 1,700 gasoline stations in six Western states. However, BP Amoco does not share Arco’s philosophy of being the lowest-priced major retailer in its markets, which could affect future pricing.

One of the few places the two companies cooperate--Alaska’s North Slope, where they jointly oversee the United States’ most productive oil field--was seen as among the most vulnerable to layoffs.

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Arco employs about 1,500 there, nearly two-thirds of them at the wells and processing facilities of the vast Prudhoe Bay and other oil fields.

An Arco executive in Los Angeles noted the two firms share “a lot of overlap” in both their Alaskan and Indonesian operations.

Arco employees across the globe were in shock at the merger with BP, long one of their rivals.

“All Arco employees will bow to the Queen of England and should have her portrait on their wall if they expect any chance in hell of remaining on the payroll after the merger,” read a message from one Yahoo subscriber.

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Within the company’s middle management, executives reserved most of their venom Wednesday for Bowlin, who they said distributed a memo just three months ago saying the company would fight to remain independent.

“We got sold out from under ourselves,” one executive said.

Another executive, at an Arco subsidiary, feared a repeat of the “blood bath” that took place at Amoco when BP started to absorb it. He predicted a massive reduction at Arco’s Los Angeles headquarters.

“I would doubt there’d be any kind of a corporate office out there” if the BP merger is approved, he said.

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Executives in Los Angeles said the merger would likely leave little more than a marketing office in Los Angeles, and some already had mailed out resumes in search of new jobs. Arco employs about 3,000 people in Southern California.

“Panic isn’t the word. It’s more shock,” one executive said. “It might be panic later.”

On Wednesday, before the merger agreement was announced, Arco’s stock slipped $1.50 on the New York Stock Exchange to close at $73.50 per share. British Petroleum’s American depositary receipts, which are equal to six shares of stock, fell $2.31 to close at $101 per share.

Lewis Ropp, analyst at Howard Weil Labuoisse & Friedrichs, a New Orleans investment company, said investors were cheered at reports that BP’s purchase price for Arco was better than the $25-billion figure that was widely rumored. Ropp said that a “proper valuation for Arco would be a price in the mid-$80s per share.”

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Ropp said that BP undoubtedly would rather have waited before bidding for Arco because it is still digesting its acquisition of Amoco. But “Arco was shopping itself around, and BP obviously thought the prize would get away if it didn’t move now,” Ropp said. BP Amoco’s purchase of Arco is expected to raise few alarms among regulators.

The Federal Trade Commission historically has been most interested in examining potential reductions of competition that might affect the consumer market, and in the oil industry that would be the refining and marketing end of the business. Oil and gas exploration has been less of a concern because it is felt that global market forces effectively control those prices.

When the merger of British Petroleum and Amoco was approved on Dec. 31 by the Federal Trade Commission a mere 99 business days after it was unveiled, relatively few conditions were attached. The FTC said that BP Amoco must sell 134 gasoline stations and nine terminals that store gasoline and other petroleum products. In addition, the company must allow 1,600 independent gasoline stations to switch to other brands of gasoline if they wish.

But each new merger concentrates the industry further, which could make future approvals more difficult to come by, antitrust experts said. The FTC is still examining the proposed merger of Exxon and Mobil, nearly four months after it was announced.

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In the gasoline business, to which the FTC pays close attention, neither the British Petroleum nor Amoco brands is well-represented in the six Western states where Arco gasoline is sold. BP Amoco has no West Coast refineries. Arco has two.

The greatest overlap is in oil exploration in Alaska, where the proposed merger already has caused considerable controversy.

Alaska Gov. Tony Knowles issued a statement Monday that he expects the state’s “strong, mutually productive partnership” to continue regardless of industry restructuring, but some state legislators have called for the companies to divest some of their holdings on the North Slope as well as pipeline ownership.

“It has us very concerned,” said Rep. Jim Whitaker, (R-Fairbanks). “Should this occur, we believe that we have legal standing to pursue our case” and will lobby the Federal Trade Commission and the Justice Department to require divestitures.

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BP Amoco and Arco together control about 70% of Alaskan oil production and natural gas production and would own about 70% of the trans-Alaska pipeline. In addition, the combined companies would run afoul of a 1959 Alaskan law that forbids a company’s ownership of more than 500,000 acres of oil-producing land.

What’s more, oil from Alaska accounts for about 50% of the oil refined by California’s 13 major refineries.

“These are issues that will raise red flags with regulators,” said Michael Cooper, a former Justice Department antitrust lawyer who works for the Washington law firm of Bryan Cave. “But I suspect that British Petroleum has taken all of this into account.”

Bowlin said BP Amoco has considered the antitrust implications of the deal and “the companies are prepared to work with (Alaska) to resolve problems. . .I feel comfortable we’ll work through problems Alaska may have.”

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Times staff writers James Flanigan, Jeff Leeds and Davan Maharaj contributed to this report.


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