Mud Wrestling In Britain's Oil Patch

In the dwindling corps of independent British oil producers, LASMO PLC stands out as a go-getter. Eager to replace its reserves as North Sea crude output wanes, LASMO went on a drilling spree that brought in lucrative oil and gas discoveries in the Irish Sea, Algeria, Colombia, Pakistan, and Indonesia. So successful was the exploration drive that LASMO expects its production to jump 25% by 1996, to about 210,000 barrels a day.

But with oil prices on the rise, LASMO's rich overseas holdings have made the scrappy independent a target for takeover. Enterprise Oil PLC, Britain's largest independent and itself hungry for new reserves, is trying to buy LASMO for an estimated $2.4 billion in stock and warrants. "LASMO has a great future cash flow, and that's exactly what Enterprise needs," observes Rodney Schmidt, a director of the Washington-based advisory service Petroleum Finance Co.

"JUNK-PAPER BID." In going after LASMO, Enterprise has touched off a CEO slugfest that has escalated into one of the nastiest merger struggles the City of London has seen in years. The contest's outcome will decide more than whether LASMO will fend off Enterprise. It may also determine whether Britain's independents will be able to afford to continue gobbling one another up. Facing scarce capital, volatile oil prices, and diminishing tax breaks, they may instead fall prey to U.S. and European oil majors trying to beef up overseas exploration arms.

The LASMO fight is focused on two chairmen with a flair for flamboyant rhetoric. Enterprise's Graham J. Hearne characterizes himself as a sugar daddy out to rescue a competitor that's "financially fragile and prone to overoptimistic statements about its prospects." LASMO's Rudolph Agnew counters that to maintain its 4.8% dividend, Enterprise may have overstated profits by as much as $370 million since 1988--a charge Hearne denies. Agnew also terms the Enterprise offer "a junk-paper bid" that will leave shareholders with stock that's almost certain to plunge.

Most oil analysts think Hearne's refusal to include any cash in his bid has turned off many LASMO shareholders--especially those in the U.S. Directly and through American depositary receipts, U.S. investors now own 25% of LASMO's equity. And "U.S. shareholders overwhelmingly prefer cash," says Guy Dawson, head of corporate finance at London's Morgan Grenfell & Co., who adds "this could prove decisive" when shareholder votes on the bid are tallied on July 1. Perhaps reflecting the Americans' dislike of all-paper bids, LASMO shares are currently trading at 9% less than Hearne's offer, even though he has sweetened it, from $2.31 to $2.54 per share--or about $7.60 per ADR--since making his first bid in April. Says one big U.S. shareholder: "Either they come up with the cash, or we're not going to give them the stock."

With Petroleum Finance estimating North Sea crude output will fall 18% by the year 2000, to 4.2 million barrels a day, LASMO has shaken up management, slashed debt, and raised $337 million for exploration. But if the Enterprise offer fails, notes Kidder, Peabody & Co. Managing Director Bernard J. Picchi, all of LASMO's efforts may not be enough to keep bigger players--perhaps Amoco, Arco, or France's Elf Aquitaine--from trying to mount a takeover for cash.

What then? Four years ago, LASMO bought another North Sea independent, Ultramar PLC, for $1.7 billion in cash and stock. But it will take more than stock to get Agnew to listen to a suitor now. "If a cash offer made sense, we would have to talk--and would do so," says Agnew. Perhaps the fight for

LASMO is only beginning.

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