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Totalfina's Totally New Game (Int'l Edition)


Industries: Mergers

Totalfina's Totally New Game (int'l edition)

Now it's in the same league as the supermajors

Business associates of TotalFina CEO Thierry Desmarest speak of his quiet, courteous manner and icy determination. That firm resolve served Desmarest well in the sometimes bitter nine-week battle for supremacy of the French oil industry. The fight ended suddenly on Sept. 13 when Elf Aquitaine agreed to be acquired by Total. In the end, Desmarest upped his initial bid for Elf by close to $5 billion to $49 billion but conceded very little else to rival CEO Philippe Jaffre. "This shows that you can start with an unsolicited offer and come to an amicable agreement," said Desmarest, discussing merger tactics the day after his triumph.

Certainly, being a master of the acquisition game is a prerequisite to success in today's fast-consolidating oil industry. With his buys of Belgium's PetroFina last December and now Elf, Desmarest has propelled TotalFina from a second-tier company to the industry's No. 4 player in less than a year. TotalFina now boasts a market capitalization of close to $100 billion, France's largest. But few expect the Elf takeover will be Desmarest's last big move.

Desmarest's next step will be to orchestrate a brutal restructuring that is likely to cost some 4,000 jobs. Once TotalFina has digested Elf Aquitaine, analysts think Desmarest may solidify the company's emerging role as a European champion by acquiring Italy's ENI or Spain's Repsol YPF. If the threat of Iran-related U.S. sanctions recedes, he might also be tempted by a linkup with a big U.S. player such as Chevron Corp. The Elf acquisition "puts TotalFina in a much better position to participate in the consolidation of the industry," says Nick Davies, oil analyst at J.P. Morgan in London.

As Desmarest is quick to point out, Total, with the addition of Elf, will be a formidable player. While less than half the size of such supermajors as Royal Dutch/Shell Group and the giants being created from the merger of Exxon and Mobil and BP Amoco and Arco, TotalFina is in the same league as these companies everywhere except North America, where it isn't much of a factor. Desmarest says he prefers to concentrate on competing in a few areas rather than to try to be the "world champion everywhere."

The acquisition of Elf will double TotalFina's oil production to over 2 million barrels per day. It will be the No. 2 independent producer in the Middle East and the leader in Africa, a new hot area. At a time when the industry is consolidating, TotalFina's production is likely to grow 5% annually in the coming years, compared with around 2% for the giants. Elf will give Desmarest the scale to improve TotalFina's returns on capital employed above its current 9%, says J.P. Morgan's Davies. But they will still likely lag behind the returns of the biggest companies, which run around 12%.

A few years ago, the French government would likely have quashed a hostile takeover attempt against one of the country's largest companies. But with consolidation picking up steam and shareholders increasingly restive, the government had little choice but to give Desmarest a green light. As two of a handful of midsize oil companies left, both Elf and Total were vulnerable.

But the French market is still not wide open. Sources close to the deal say that the government's apparent desire for a national champion and its "golden share" in Elf, which will be retained in TotalFina, deterred potential foreign bidders. Jaffre himself says his vigorous defense, including a so-called Pac-man bid for Total, was to compensate for this absence of competition. "Perhaps it is a new approach in France," Jaffre says, "But I am proud that I have done my duty for shareholders." He adds: "I am a little bit sad [about the takeover], but that is life."

Jaffre could have prolonged the fight, but he decided to settle when he saw that investors clearly favored Desmarest. In addition, the two CEOs had asked Edouard de Royere, a former chairman of Air Liquide, to be their confidential go-between. In several weeks of shuttle diplomacy, he helped bridge the gap between the rival bosses. Final terms were hammered out over the weekend of Sept. 10-11 by two independent board members from each company and bankers from Goldman Sachs and Morgan Stanley Dean Witter, which led the defense, and Credit Suisse First Boston, which advised TotalFina.REWARDS. Jaffre can be congratulated for getting a good price. Indeed, Desmarest will have negotiated away most of the potential benefit of the combination for Total shareholders if he only achieves the $1.5 billion in cost cuts and other gains that he is promising. But if, as some analysts figure, Desmarest wrings $2 billion to $3 billion in gains, Total shareholders will also do well. "It is a good deal for everyone involved," says Davies. Elf's bankers also were amply rewarded: Goldman Sachs and Morgan Stanley Dean Witter may earn about $60 million each.

For Desmarest, spending his days with investment bankers hunting oil on the stock market is relatively new. He made his reputation with equally daring deals with some of the more controversial oil-producing countries. TotalFina is in the lead in developing oil and gas projects in Iran. With Elf, it is also on the fast track for projects in Iraq, when U.N. sanctions are lifted. These countries may seem pariah states now, but they are likely to become more influential in the industry. That's because they have high reserves and low production costs.

Desmarest is hopeful that TotalFina's growing heft will help persuade Saudi Arabia, which has the largest oil reserves but prefers to deal with American and British companies, to be more open to a French player. But he pooh-poohs any notion that his swashbuckling could lead to tension between the U.S. and France. With the huge potential of the Middle East, Desmarest says, there will be "plenty of room for American and European companies." At the rate he and his counterparts at the other big players are snapping up rivals, there are only going to be a handful of serious competitors anyway.By Stanley Reed in ParisReturn to top


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