Doubts Over Merger, and Arco’s Fate

As speculation mounted Wednesday that BP Amoco’s proposed $32.6-billion buyout of Atlantic Richfield Co. faces a serious regulatory threat, it raised a question: What if the deal ultimately collapses and Arco--California’s top seller of gasoline--is left standing alone?

Two answers emerged from industry analysts, even though they cautioned that the merger is far from dead: that this year’s surge in oil prices means Los Angeles-based Arco is in much better shape to survive as an independent than it was a year ago, but that Arco nonetheless remains a potential takeover target for another oil company.

But BP Amoco and Arco won’t even talk about such a scenario, insisting Wednesday that their marriage--announced in April--will ultimately be completed after approval by the Federal Trade Commission.

“Discussions with the FTC continue, and we believe the FTC has not reached any conclusion,” Arco Chairman Mike Bowlin said in a statement. BP Amoco spokesman Youssef Ibrahim said his company is “confident we will bring this [merger] to a successful conclusion.”

Arco’s future came under renewed scrutiny Wednesday amid published reports, quoting unnamed sources, that an FTC review staff was going to recommend to the full five-member panel that the merger be challenged on grounds it might run afoul of antitrust laws by giving the combined companies too much control over oil production and thus harming consumers with higher prices.

And despite the companies’ statements to the contrary, one analyst, Michael Young of the investment firm Deutsche Bank Alex. Brown, said the developments mean he will downgrade his rating of Arco’s stock today to “hold” from “buy.”

“The risks to this transaction have increased substantially,” Young said.

The main problem reportedly is that BP Amoco-Arco would have a combined 70% or more of Alaska’s crude-oil production. That figure will drop to roughly 60% under a tentative pact reached between BP Amoco and the state of Alaska, but that level is still said to be a concern to the FTC.

The FTC declined to comment, except to say it is reviewing the deal.

Meanwhile, Alaska announced Wednesday that it has reached a definitive agreement with BP Amoco regarding the merger, which will be signed by Alaska Gov. Tony Knowles today. A tentative pact had called for BP Amoco to divest 175,000 barrels of daily oil production in Alaska, but it was not immediately known whether that figure would change.

The FTC reports surfaced a day after the agency approved the $80-billion merger that created Exxon Mobil Corp. by combining the two largest U.S. oil companies. Approval came only after Exxon and Mobil made historic concessions, including the sale of 15% of the companies’ gasoline stations and other assets worth a combined $2 billion.

Any number of scenarios could occur to allow the BP Amoco-Arco deal to proceed. Those companies, too, could make enough concessions to satisfy the FTC that consumers would not be harmed. The parties could also battle in court over the matter, though such lengthy proceedings might eventually prompt either company to back out of the deal.

But BP Amoco’s Ibrahim said that “we don’t even think it will get to that point” of reaching the courts.

And for now, Arco’s Bowlin has lashed out at the unconfirmed reports that the FTC is ready to block the deal, saying: “Our shareholders, customers and employees do not deserve this type of twisting and turning that comes with whispered rumors through the news media.”

In any case, the oil market this year has certainly worked in the favor of Arco, which has slightly more than 20% of the California retail gasoline market, just ahead of Chevron Corp.’s 19% share.

A year ago, when Arco was struggling badly and enduring its second major restructuring of the decade, crude-oil prices had plunged to $10 a barrel. Yet lately, crude has eclipsed $26 a barrel, its highest level since the Persian Gulf War in 1991.

That has boosted Arco’s profit in recent quarters and sent its stock surging 41% so far this year. However, the FTC reports helped Arco’s stock lose $3.88 a share Wednesday to close at $92.06, while BP Amoco’s American depositary receipts--the U.S. version of its stock--gained 56 cents apiece to $61.50. Both trade on the New York Stock Exchange.

The deal calls for BP Amoco to exchange 1.64 of its ADRs for each of Arco’s approximately 323 million common shares outstanding.

But if Arco remains an independent, oil prices will keep dictating much of its fate.

“Arco could certainly survive” standing alone, “but whether it thrives is another question,” said analyst Tyler Dann of Banc of America Securities in Houston.

And Deutsche Bank’s Young said it is not a sure bet that another company would want to buy Arco. Chevron, Texaco Inc. and Royal/Dutch Shell have often been named as possible suitors, but all have significant West Coast operations.

The FTC “has drawn a strict line in the sand regarding the concentration of West Coast refining and marketing assets,” Young said.

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Deal in Peril?

BP Amoco’s proposed buyout of Atlantic Richfield reportedly faces tough regulatory scrutiny because of both companies’ Alaska production. But even if the deal collapses, Arco’s stock has gained because of surging oil prices. Monthly closes and latest:

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Source: Bloomberg News