Chevron to acquire Texaco for $35 billion in stock

By MICHAEL LIEDTKE

Associated Press

SAN FRANCISCO — Chevron Corp. is buying rival Texaco Inc. for $35 billion in a stock swap that will create the world’s fourth-largest oil company.

The combined company will be called ChevronTexaco Corp., and joins the ranks of other industry powerhouses formed by similar mergers: Exxon Mobil Corp., Royal Dutch/Shell Group and BP Amoco PLC.

The proposed marriage between the No. 2 and No. 3 U.S. oil companies comes against a backdrop of record oil industry profits and intensifying anxiety about rising gas prices. It will also result in an estimated 4,000 job cuts.

A combined Chevron and Texaco would have earned about $3.3 billion on revenues of $66.5 billion in 1999. The largest U.S. oil company, Exxon Mobil Corp., had 1999 sales of $160.9 billion.

To win government approval of the deal, ChevronTexaco will likely have to sell several U.S. refineries and hundreds of gas stations, particularly on the West Coast. Without divestitures, ChevronTexaco would control 40 percent of the West Coast retail market and one-third of the region’s refinery capacity.

"There are going to be some considerable challenges to getting this deal done" because of antitrust concerns, predicted Tyler Dann, an oil industry analyst with Banc of America Securities in Houston. He said the companies "need to take a pre-emptive strike and sell assets to satisfy regulators as soon as possible."

John Watson, Chevron’s chief financial officer, said in an interview that it would be in the country’s best "national energy interests" for the Texaco takeover to win quick approval, because the combined company would be able to compete better with Netherlands-based Shell and London-based BP Amoco.

"We expect regulators and politicians to strongly support this merger," Watson said.

Fadel Gheit, an oil analyst with Fahnestock &amp Co. in New York, said the union between Chevron and Texaco shapes up as a more compatible match than some of the industry’s other recent deals.

"This is the perfect merger," Gheit said. "This is like two high school sweethearts getting together. This company won’t be as big as some of the others, but pound for pound, it will be very competitive"

Even as San Francisco-based Chevron and White Plains, N.Y.-based Texaco competed against each other, the two companies have shared a business bond for decades. For the past 65 years, they have co-owned a joint venture called Caltex Corp., which sells 1.8 million barrels of crude oil and petroleum products per day and operates in 55 countries.

Chevron tried to buy Texaco last year, but those talks unraveled over disagreements about price and issues of control and broke off in June 1999. Texaco CEO Peter Bijur reportedly wanted to run the combined company — a demand rejected by Chevron’s then-CEO, Kenneth Derr.

After Derr retired at the end of 1999, David O’Reilly took over as Chevron’s CEO, paving the way to reopen talks with Texaco. Texaco’s stock also had been lackluster since breaking off its talks, putting Bijur under greater pressure to find a way to improve shareholder returns.

O’Reilly, 53, will be chairman and chief executive officer of ChevronTexaco, which will remain based in San Francisco. Bijur, 58, will be vice chairman.

Under terms of the deal, Chevron will exchange 0.77 of its shares for each Texaco share, roughly the same ratio that it offered Texaco in 1999. Based on Friday’s closing price of Chevron’s stock, the price translates into $64.87 — an 18 percent premium for Texaco shareholders. Chevron also will assume roughly $8 billion of Texaco’s debt.

In early trading Monday on the New York Stock Exchange, Chevron’s stock fell $4.375 to $79.875 while Texaco’s shares gained $1.81 to $56.94.

Some 4,000 jobs, or 7 percent of the 57,000 combined jobs at Chevron and Texaco, will be eliminated as a result of the deal, which will result in annual savings of $1.2 billion, the companies said.

If the savings are realized, analyst Gheit said they would boost ChevronTexaco’s market value by $12 billion, based on recent price-to-earnings ratios paid for oil companies.