Originally created 06/04/99

Texaco, Chevron cancel merger talks

NEW YORK -- Merger talks between energy companies Chevron Corp. and Texaco Inc. were halted Wednesday amid disagreements over price and the complexity of the deal.

In a statement Wednesday after the markets had closed, Texaco said that Chevron's proposal to buy Texaco was "unacceptable for several reasons, including complexity, feasibility, risk and price."

Chevron confirmed separately in a short statement that negotiations between the two had been called off. Both companies declined to comment further.

The deal would have resulted in the world's fourth-largest energy company with nearly $60 billion in revenue.

A Chevron-Texaco deal was seen by analysts as an important step for both companies to compete effectively in the rapidly consolidating energy market, which is now dominated by three giants: Royal Dutch/Shell, BP Amoco and the soon-to-be combined Exxon-Mobil Corp.

The oil industry has seen a series of mergers of late, touched off by historically low prices that have crimped profits and necessitated deep cost cutting.

However, the Texaco-Chevron merger likely would have faced several regulatory hurdles because of overlapping operations. Adam Sieminski, an analyst with the Baltimore-based BT Alex. Brown Inc., said the companies likely would have had to sell off a number of their combined assets, including service stations and refineries, in order to receive approval from the Federal Trade Commission.

Chevron was offering $70 a share, or roughly $37 billion, for Texaco, according to a source familiar with the negotiations -- well below the rumored price of $80 a share, or $42 billion. That represented a premium of only 9 percent above Texaco's closing stock price Wednesday.

The source, who would only speak on condition of anonymity, said the low price was a key reason why the Texaco board rejected Chevron's bid.

In early trading today, Chevron jumped $1.68Ü to $93.68Ü a share on the New York Stock Exchange, where Texaco was down 12´ cents at $64.37´.

A Chevron spokesman declined to comment on the negotiations.

In a statement, Chevron chairman and CEO Kenneth Derr said he was "surprised that the Texaco board turned down a very competitive offer that included a significant price premium to Texaco shareholders and an opportunity to receive Chevron stock, with its acknowledged strong growth prospects."

Combined, the two companies would have controlled roughly 26 percent of the refinery operations in the United States, said Sieminski, adding that it was likely the FTC would have made the companies reduce control to less than 20 percent before approving the deal.

Texaco already has an alliance with Shell, the U.S. subsidiary of Royal Dutch/Shell Group -- that venture has several overlapping operations with Chevron. Individually, Texaco and Chevron also overlap on the West Coast.

While the companies were aware the deal faced regulatory hurdles, the source said Chevron wanted Texaco to sell off some of its assets, rather than vice versa.

That proved unacceptable to Texaco.

Another sticking point apparently was control, as Chevron wanted to have its management team run the entire company, as opposed to a melding of the top company officials, the source said.

The management issue did not come up during board discussions Tuesday, the source said, but it could easily have proven to be a deal-killer as well.

"Chevron pretty clearly wanted (Texaco's) assets, not its management team," said Sieminski.

Chevron, based in San Francisco, had revenue of $26 billion in 1998 while Texaco, based in White Plains, N.Y., had revenue of $31.8 billion. The combined total of nearly $58 billion would still leave them well short of the world's top three energy companies, each of which will likely generate at least $80 billion in revenue this year.

Chevron had pursued Texaco after it failed to win a bid for Atlantic Richfield Co. earlier this year. Chevron lost out to BP Amoco, which agreed in March to buy Arco for $26.8 billion.

If the $37 billion merger had been successfully completed, it would have ranked among the biggest mergers ever. It would have been dwarfed, however, by the recent merger of Exxon and Mobil, which is currently worth $82 billion. That deal still faces regulatory approval.


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