Chevron, Texaco Agree to Merge in $36-Billion Deal
Chevron Corp. and Texaco Inc., deciding merger is better the second time around, agreed Sunday to a long-rumored $36-billion combination of the two oil giants, top company executives confirmed.
The deal, which follows a failed attempt by the two firms to merge last year, comes at a time of soaring oil and natural gas prices, and is sure to attract the scrutiny of regulators and consumer groups.
The transaction, to be formally announced today before the stock market opens, was approved Sunday at separate meetings of the companies’ boards of directors, according to senior executives who requested anonymity. The merger would create the world’s fourth-largest publicly traded oil company--to be called ChevronTexaco Corp.--with the financial muscle and low cost structure to find and produce oil and natural gas in far-flung corners of the world, analysts said.
In acquiring Texaco, San Francisco-based Chevron could achieve $1.2 billion in savings, including 4,000 expected layoffs, the executives said.
Whatever benefits may await the merger partners, the deal is sure to be opposed by consumer advocates, who contend that the business of producing oil, refining it into gasoline and selling fuel to the public already is concentrated in the hands of too few companies.
Such a merger certainly would be closely scrutinized by the Federal Trade Commission, which is investigating gasoline pricing in California and the Midwest, and California Atty. Gen. Bill Lockyer, who is conducting his own probe of the state’s chronically high gasoline prices.
In the last few years, the FTC has delayed but ultimately allowed the creation of “super-major” oil companies through November’s merger of Exxon and Mobil, as well as British Petroleum’s 1998 purchase of Amoco Corp. and its April purchase of Atlantic Richfield Co. Exxon Mobil and BP, as the companies now are known, were required to sell significant assets to get their deals approved.
“The headline for the average Joe will be: ‘Big Oil Merging Again'--one less company and it will be easier for them to gouge the public,” said Phil Flynn, senior energy analyst with Alaron Trading Corp. in Chicago. “But the reason oil companies merge is not to fix prices, it’s to stay in business.”
Combining Chevron and Texaco would enable the companies to leap a big hurdle they can’t scale on their own: Both, while large, have not attained the behemoth status of Exxon Mobil, Royal Dutch/Shell Group and BP. And this is an industry in which companies must commit huge sums to the exploration and development of oil and gas fields every year.
“It was inevitable,” said Philip K. Verleger Jr., a Newport Beach-based energy economist and a principal with the Brattle Group consulting firm in Boston.
“Putting Texaco and Chevron together, you almost have a super-major. They’re an economy-size super-major.”
The Texaco acquisition would bring Chevron cost savings--layoffs, elimination of duplicate facilities--but it also would give it greater heft in Kazakhstan, site of the California firm’s massive Tengiz project, because Texaco is there too.
The combination would give the resulting company greater strength in Africa. Texaco has a major new offshore development in Nigeria called the Abgami field; Chevron has new developments in Nigeria and Angola. Texaco also is big in Venezuela and has natural gas interests in the Philippines, while Chevron has big gas properties in Indonesia.
$72 Billion in Revenue Between the Two
If they had operated together in 1999, the two companies would have generated $72.3 billion in revenue and would have produced about 2.7 million barrels of oil and natural gas daily. Their proven reserves would be 11 billion barrels, including the largest concentration of oil reserves in the United States of any oil company.
“We will be a strong and formidable upstream competitor,” one Chevron executive said. “This is about making our companies more competitive. When you put the two companies together, we are better able to absorb risk.”
What the combination would do to refining and retailing of gasoline in the U.S. is unclear. Texaco is the largest seller of gasoline in the nation through two joint ventures: one in the West with Shell, called Equilon, and another in the East with Shell and Saudi Aramco, called Motiva. Chevron is fifth in the nation but is No. 2 in California, where Equilon ranks fourth in terms of gallons sold.
But the Chevron and Texaco executives said Sunday that they expect the FTC to require them to sell off significant refining and retailing assets, and they already have begun talks with Shell about buying the Texaco piece of the joint ventures. If that happened, market concentration in gasoline and refining would remain the same as before the deal.
In fact, Chevron and Texaco are operating on the theory that the FTC would support the merger, with divestitures, because it would create a strong U.S.-based competitor to Royal Dutch/Shell of the Netherlands and BP of Britain. What’s more, the two U.S. companies would be able to find oil and natural gas more easily and more cheaply than they could on their own, which ultimately would be good for consumers, the executives said.
“It is in the interests of consumers to have low-cost producers,” one executive said.
But analyst Flynn worried that the merger could get snagged in the continuing government gasoline price investigations, and the Brattle Group’s Verleger said the FTC could use this proposed combination to examine why previous mergers have, as yet, failed to produce the expected increase in investment in exploration and production.
The marriage of Chevron of San Francisco and Texaco of White Plains, N.Y., almost came off a year ago but dissolved in June 1999 because of questions of price and who would run the resulting company. Since then rumors of a renewed courtship resurfaced repeatedly, bursting out again Friday.
Looking to Trim $1.2 Billion in Costs
Under the terms of the proposed transaction, Chevron would swap 0.77 of a Chevron share for each of Texaco’s 551.25 million shares outstanding, or $64.88 apiece based on Friday’s closing prices on the New York Stock Exchange. In all, the transaction is valued at about $36 billion plus the assumption of about $7 billion in Texaco debt.
The merger offer represents an 18% premium over Texaco’s $55.13-per-share closing price Friday on the NYSE; Chevron closed Friday at $84.25.
The combined company, should it pass muster with regulators, aims to cut $1.2 billion in annual costs and expects to have reached that goal within six to nine months after the deal closes, the executives said. About $700 million of that would come from exploration and production operations.
Caltex, a 64-year-old Chevron-Texaco joint venture for refining and marketing in Asia and Africa, would yield significant savings on its own because it could be operated more efficiently by one company than by two, the executives said.
Work Force Would Slim by About 7%
About 4,000 jobs would be eliminated in the merger, accounting for about 7% of the combined 57,000 employees of Chevron, Texaco and Caltex, the executives said. They declined to specify where the layoffs would fall.
The merged company would be based in San Francisco. Chevron Chairman and Chief Executive David J. O’Reilly would hold those jobs with the merged company. Texaco Chairman and Chief Executive Peter I. Bijur would become vice chairman in charge of refining and marketing operations, chemicals and power.
In an interview in June, O’Reilly noted that the failure to reach a merger agreement with Texaco last year was a lost opportunity.
“We could get bigger through merger and bigger through internal growth,” he told The Times. “But on the one count, it takes two to tango. We made an attempt and it didn’t work out.”
However, he added: “It’s important for us to be big in scale wherever we go.”
Times staff writer James Flanigan contributed to this story.