The Guardian: BP should consider the 'mother of all mergers' with Shell: ”Many Shell shareholders are antagonised by the slow speed with which the board is looking at reforms and many of its board members are discredited by previous failures.”
Terry Macalister
Thursday July 15, 2004
Global crude prices were back over the $40 a barrel mark yesterday amid reports of a doubling of activity in the UK North Sea, previously dubbed by sceptics the Dead Sea.
Sky-high prices have encouraged firms to spend more on exploration and development but not on merger and acquisition activity, partly because of strong equity values.
An interesting time, then, for a respected oil and gas expert to propose "the mother of all mergers" - a tie-up between BP and Shell.
The Anglo-Dutch company has seen its share price pulverised as a result of its reserves downgrade this year followed by the termination of contracts for chairman Sir Philip Watts.
Already there has been speculation that Total of France has been taking a serious look at the potential a deal with Shell could offer.
What wouldn't Lord Browne, the BP chief executive, do to end his career on the very highest note: taking over from Lee Raymond of ExxonMobil as industry number one, head of the biggest quoted oil firm in the world?
It must have crossed his mind as he relaxed one weekend in his beloved Venice, but he no doubt dismissed it.
Yet is it such a strange idea? Fadel Gheit, an analyst from New York brokerage group Oppenheimer, argues BP would make an ideal merger partner for Shell and urges shareholders to push for such a combination.
He believes Shell has excellent assets, strong financials, a global presence and dedicated staff. What it has not got is the kind of management expertise to "restore its industry standing and achieve its potential".
Mr Gheit suggests there would be synergies of $10bn (£5.3bn) in three to five years while more cash would be raised by the disposals forced by national regulators.
John Browne, argues Mr Gheit, is highly respected, innovative and bold. It was he, after all, who set the mega-merger train rolling that brought together BP with Amoco and Arco while pushing Exxon into its own takeover of Mobil.
"We think under the leadership of BP's current CEO with the two companies' assets, operations and global presence, BP-Shell would make a perfect merger," says Mr Gheit in partnership with his sidekick John Cusick.
London analysts were falling over themselves to dismiss these ideas as "ludicrous" and "silly season stuff", insisting such a plan would not get past the securities and exchange commission.
The downstream side of the business - refineries to petrol stations - would attract enormous interest from the US and other regulators.
Oil companies add billions to government coffers through taxes and make relatively small profits in Britain through selling petrol, but they are still held in as low esteem as estate agents by the public.
BP and Exxon have been making the biggest profits in corporate history and the idea of a reduction in competition through mergers would be seen as political suicide.
In fact BP had serious trouble winning SEC approval for its Arco takeover while Shell's downstream closures in the US have already attracted regulatory concern.
The Anglo-Dutch group has a complicated governance structure that would make it hard for an outsider to take control but it would not be impossible.
Many Shell shareholders are antagonised by the slow speed with which the board is looking at reforms and many of its board members are discredited by previous failures.
The North Sea might have seen nearly as many wells drilled in the first six months of this year (12) as the whole of 2003 but the big 10 oil firms only spent $7bn on global exploration and development last year compared with double that figure five years earlier.
BP has the highly rated paper to go for one more roll of the takeover dice and has been hoarding cash from this period of high oil prices.
Total, with its smaller scale and lower visibility to regulators, would be a more obvious predator for Shell, while in recent times Lord Browne has been focused on places such as Russia and China.
But there is no technical reason why BP could not launch a groundbreaking move on a target closer to home tomorrow.
http://www.guardian.co.uk/business/story/0,3604,1261452,00.html