Bp Amoco: This Giant Sure Has A Big Appetite

Its bid for Arco sets a new pace for consolidations

Sir John Browne is no stranger to Alaska's North Bay--or to Atlantic Richfield. One of his first jobs at British Petroleum was helping to design part of the Alaska pipeline. And as chief executive of British Petroleum Co. Exploration in the early 1990s, Browne traveled often to Prudhoe Bay, where BP and Arco operated a joint drilling venture. Now, as CEO of BP Amoco PLC, Browne is headed back to those roots--in a surprise megadeal to acquire Arco and expand BP's oil and gas assets in Alaska and elsewhere.

If BP Amoco succeeds in its $25 billion takeover of Arco, it will add more than $10 billion in revenues and reach a market capitalization of $190 billion. BP Amoco Arco, as the merged company may be called, would control a majority of Prudhoe Bay, the largest oil and gas field in the U.S. BP would get West Coast gasoline retailing and a greater presence in Asia, including Arco's successful natural gas projects in Indonesia and a share of China's Yacheng gas field.

For all its logic, the deal astounded other oil industry execs. After all, BP is still in the midst of digesting Amoco. And when Brown snagged Amoco last fall, he all but promised shareholders that he would not try another major deal soon. But that was before Exxon Corp. and Mobil Corp. agreed to team up and form a new industry Goliath.

The 51-year-old Browne is also making a major bet on where oil prices are headed. After falling over two decades, prices have bounced back from around $10 last fall. With Organization of Petroleum Exporting Countries members agreeing to cut production by 1.7 billion barrels per day starting on Apr. 1, the price has recently jumped from about $12 to $14.50. And BT Alex. Brown oil analyst Fergus MacLeod predicts prices will hit $16 by yearend and $18 by 2001.

That should boost post-merger earnings nicely. And it would help take the sting out of taking on Union Texas Petroleum, which Arco bought for $2.5 billion last June. "Arco bought Union for around $17 a barrel at a time when crude oil prices had dipped to $10," says Mark Purdy, a senior analyst for the Arthur Andersen Petroleum Services Group in London.

ALASKA OPPOSED? The BP-Arco deal is the fruit of two months of transatlantic talks between Browne and Mike Bowlin, his counterpart at Arco. The two shook hands on a deal in Los Angeles, and on March 30, the BP Amoco board approved the plan. The Arco board was expected to approve the merger on Apr. 1.

Because the two companies have little overlap, the deal is unlikely to meet with Federal Trade Commission opposition. The main opposition is likely to come from Alaska, where the new entity will control just under 70% of all oil production. In the past, Alaska's GOP leadership was keen to make the state more attractive to new entrants. Now, authorities fear the new company's heft would intensify barriers to entry. BP Amoco disagrees, believing it could lower the cost of oil production in Alaska, making the market more competitive.

With this deal, Browne buffs his reputation as one of the industry's most forceful leaders. Through acquisition and restructuring he has made BP one of the world's most efficient players. Earlier, as head of BP Exploration, Browne realigned the company's portfolio, shifting from mature markets to new areas including Algeria, Azerbaijan, Colombia, and the Gulf of Mexico. After becoming group chief exec in 1995, he focused on the untapped Alaskan gas reserves. With the Arco acquisition, BP Amoco will gain access to the 25 trillion cubic feet of natural gas that Arco controls in Alaska. Eventually, BP Amoco hopes to use its technology and the trans-Alaska pipeline to convert it into liquids.

COST SLASHER. Can Browne manage the expansion of BP's empire? General Sir James Glover, former commander in chief of British land forces, who recently retired from BP Amoco's board after nearly a dozen years, has no doubts. "He's able to quickly identify priorities and relentlessly pursue them. From the very first day I met him, I realized he was destined for the top," he says.

It was Browne, in fact, who oversaw BP's first megamerger, the acquisition of Standard Oil of Ohio. Since the Amoco deal last summer, Browne and his team have identified most of the 10,000 jobs to be eliminated and slashed costs by $2 billion one year ahead of schedule. By acquiring Arco, BP Amoco hopes to save an additional $1 billion.

Browne clearly is setting the pace for consolidation in the industry. Shrinking margins and rising costs have convinced industry execs that most companies can no longer afford to go it alone, says David R. Bliss, vice-chairman of Delta Consulting Group Inc. Now, Anglo-Dutch giant Royal Shell is feeling the heat, and France's Elf Aquitaine has expressed interest in doing a deal. And in the U.S., Chevron Corp. and Texaco are the most likely merger candidates. The two are often mentioned as a logical merger play because of their successful joint ventures in Asia. "Now, they may be forced to do a deal or risk getting left in the dust by the Europeans," says Tim Whittaker, oil and gas analyst at Commerzbank Global Equities in London. Or at least by Sir John Browne.

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