| BUSINESSWEEK ONLINE : JULY 19, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
A Gusher for Total? (int'l edition) Merging with Elf Aquitaine would give it the heft it needs Thierry Desmarest is one of those rare corporate bosses who regularly thumb their noses at convention. His bold moves, such as his U.S.-defying megadeals in Iran, have helped turn Paris-based TotalFina from a middling also-ran to one of the world's fastest-growing oil majors. But Desmarest's $44 billion bid for fellow French energy giant Elf Aquitaine on July 5 is his most audacious step yet. The industry has long considered such a deal logical but ruled it out because of likely objections from the French government, which can block the deal. ''The view was always that this can't happen; it was outside the box,'' says Joseph A. Stanislaw, Paris-based president of Cambridge Energy Research Associates. But Desmarest wasn't convinced. In his mind, the two companies were a dream match, with complementary properties across the board. With the industry fast consolidating and huge mergers becoming more common in France, he grabbed his chance. The government, he figured, would see that combining Total and Elf now offered the best shot at keeping a leading role for France in the oil industry. The 53-year-old Desmarest tried to nudge his Elf counterpart, Philippe Jaffre, into a merger at one of their regular lunches. But when Jaffre, 54, publicly ruled out a deal at Elf's May annual meeting, Desmarest pounced. ''The quickness of our reaction probably surprised him,'' he says. So far, his strategy looks good. The stock prices of both companies have surged, and the government has cautiously endorsed the deal, although it objects to the 2,000 job cuts that Desmarest is planning in France. But the proposed takeover, like the recent Banque Nationale de Paris bid for Societe Generale and Paribas, won't be a full free-market triumph. In both deals, the government wants to deter foreign bidders while encouraging the birth of national champions. Other political undercurrents swirl around the TotalFina-Elf deal. Privatized only in 1995, Elf was long a tool used by the French state to exercise diplomacy in Africa, where Elf's operations are concentrated. ''That's why the government can't let Elf fall into the hands of a foreign oil company,'' says Elie Cohen, research director at the National Center for Scientific Research in Paris. In addition, as France has more aggressively pursued illegal campaign financing and other white-collar crimes, former Elf managers have been caught up in investigations of influence peddling, kickbacks, and misuse of corporate funds. Though he has yet to be charged, former Elf Chairman Loik Le Floch-Prigent was jailed for six months in 1996 by magistrates who feared evidence would be destroyed. IMPERIOUS STYLE. Jaffre, who was hired by the conservative government of Edouard Balladur in 1993 to clean up the mess, has cut costs and put Elf on a more business-like footing. The company's production, however, has been declining while Total's is growing at a 12% annual rate. Meanwhile, Jaffre's imperious style has riled fellow managers, employees, and politicians alike. A Total takeover would get rid of an irksome corporate chief and put Elf in the hands of a consensus builder with vision. ''I feel sorry for Jaffre given what he has achieved at Elf in the last five years, but this deal creates massive value for both sets of shareholders,'' says Nick Davies, an analyst at J.P. Morgan & Co. in London. If the deal goes through, it would also create an oil behemoth that would rank fourth in the world by most industry measures (table). TotalFina had a net income of $2 billion in 1998 on $35 billion in sales, while Elf earned $600 million on sales of $34 billion. The new company would enjoy strong positions across the globe except in North America. With an $86 billion market capitalization, the company would seem safe from takeover for the moment. But it would still be smaller than Royal Dutch/Shell Group, valued at $208 billion, as well as Exxon Corp. and BP Amoco PLC, which will be even larger once their respective acquisitions of Mobil Corp. and Arco are done. Still, Desmarest's new giant will have an edge in certain key areas. Thanks to his bold strategy of risking U.S. ire, the new company's production is expected to grow at a 5% to 6% rate over the next few years--compared to 2% to 3% for bigger companies. Iran, where Desmarest shrugged off the threat of sanctions to sign deals beginning in 1995, will be a big help. Through Elf, Desmarest would also gain the choicest properties in fast-growing oil fields of West Africa. And thanks to France's unwillingness to toe the U.S. line, his company may gain the inside track in oil-rich Iraq. On the retail side, the new company would be tops in France and second in Spain and Belgium. In refining and marketing, it would have an 8% market share in Europe--roughly tied for third with BP's joint venture with Mobil and Italy's ENI. If Desmarest succeeds, three of the world's top oil companies will be European. Indeed, some observers wonder whether leadership of the industry isn't shifting from cost-cutters to risk-takers and dealmakers. Desmarest is in the mold of BP Amoco CEO John Browne, who comes out of exploration and production and is known for his global experience. By contrast, many U.S. oil CEOs are conservative managers from downstream or finance backgrounds. Desmarest can't notch up Elf yet. Elf has dubbed Total's bid hostile and assembled a team of investment bankers, including Goldman Sachs, Morgan Stanley Dean Witter, Lazard Freres, and BNP to work out a defense. Elf, which is only slightly smaller than TotalFina in market capitalization, might even mount a counterbid. But those who know Desmarest say it will be hard to deter him. ''Once Desmarest makes up his mind, he is tough as hell,'' says J. Robinson West, chairman of Petroleum Finance Co., a Washington-based consultancy. Indeed, even in the Elf camp there is doubt about whether it can remain independent now. The talk is more of white knights and a higher price than of returning to the status quo. Desmarest may also raise his bid, which represented only a modest 15% premium over Elf's stock price when announced. TotalFina is offering four of its shares for every three Elf shares. FAIR OFFER. Other companies are doubtless considering whether to come in with an offer. Elf might be appealing to Chevron Corp. or Texaco Inc., whose merger talks recently broke down. ENI is also a possibility. But potential acquirers may be deterred by the government's desire for a French solution. The most likely outcome may be for Desmarest to up his bid in return for Elf accepting the deal. Desmarest says his offer is fair, but says, ''I hope that at a later stage we will have the blessing of the board. It is important to do [the merger] in a friendly way between staff.'' Not long ago, it seemed that Elf, not Total, would be the winner of the French endgame. Elf was larger, but Total grew rapidly through acquisitions and aggressively managing its producing properties. Perhaps the final blow was Total's deal to acquire Belgium's PetroFina. It catapulted Total beyond Elf in size and gave Desmarest the credibility and heft to go after Elf. None of this is to say that Desmarest will have an easy time. Even if he wins what could be a messy battle, he may have difficulty integrating Elf's civil service-like staff. Remember, too, that much of TotalFina's production comes from politically risky areas, including Burma, Iran, and Indonesia. But Desmarest seems to have the qualities it takes to lead his company through today's fast-changing oil patch. By Stanley Reed in London and Gail Edmondson in Paris _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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