Big oil merger faces hurdles

The Associated Press

SAN FRANCISCO — Chevron Corp.’s proposed $34 billion purchase of Texaco Inc. would create the world’s fourth-largest publicly traded oil company, though not before the combined entity would be forced to make significant divestitures to satisfy government regulators.

"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 Bank of America Securities in Houston. "They need to take a pre-emptive strike and sell assets to satisfy regulators as soon as possible or it could turn into a real political football."

Dann and other industry analysts still expect the new company, dubbed ChevronTexaco Corp., to win regulatory approval within six to 12 months after selling several refineries and hundreds of gas stations, primarily in the West and the South.

Without divestitures, ChevronTexaco would control 40 percent of the West Coast retail market and one-third of the region’s refinery capacity.

The new company will also trim about 7 percent of its work force — about 4,000 workers — to help achieve what it estimates would be annual savings of $1.2 billion.

Assuming the deal goes through, San Francisco-based Chevron and White Plains, N.Y.-based Texaco will still lag far behind the so-called "super" majors — Exxon Mobil Corp., Royal Dutch/Shell Group and BP Amoco PLC, which have muscled up through huge mergers in recent years.

Analysts suspect ChevronTexaco will find that the rules of the game have changed dramatically since the first wave of oil industry deals in 1998.

"The pressure is building on oil companies. This deal is going to get a lot of scrutiny," said Stephen Smith, an analyst with Dain Rauscher Wessels in Houston. "The amount of attention given a merger when gas is $1.20 per gallon is not the same amount of attention given when it’s approaching $2 per gallon."

Chevron Chairman David O’Reilly, who will be CEO of the combined company, said executives are prepared for an extensive review.

"I think this is a politically good time to address the issue," O’Reilly said Monday of high energy costs. "We will be able to provide energy to U.S. consumers in a better way than we could have done separately."

Analysts regard Chevron and Texaco as a good fit because they have many complementary operations internationally, including West Africa and Brazil, home to some of the world’s largest new oil fields.

Chevron tried to buy Texaco last year, but those talks unraveled over disagreements about price and issues of control.

Chevron will exchange 0.77 of its shares for each Texaco share, roughly the same ratio that it offered Texaco in 1999. Chevron also will assume roughly $8 billion in debt.

In trading Monday on the New York Stock Exchange, Chevron’s stock fell $2.25 to $82, while Texaco’s shares gained $3.88 to $59, lowering the value of the deal from its initially announced $35 billion.