Battle of oil giants tests French commitment to open competition

News Analysis: Is the French government trying to prevent foreign firms from buying key industries?
Click to follow
THE HOSTILE bid launched by TotalFina for fellow French oil giant Elf Aquitaine is not simply a takeover battle. It has set the stage for a battle between the state and the market place.

The decision by Elf to reject the bid has opened it up to bids from overseas rivals in a move that would test the French government's commitment to open competition. BP/Amoco, Royal Dutch Shell, ENI of Italy, Exxon and Chevron of the US are all possible bidders.

TotalFina wants to create a giant French industrial entity with a market value of pounds 54bn that could compete in a rapidly consolidating global market. The combined business would be the fourth largest oil group in the world, just behind BP/Amoco, Exxon/Mobil and Royal Dutch Shell.

Key to the merger will be the attitude of the French government, which still holds a golden share in Elf that allows it to block a takeover. The government wants to see the creation of national champions in strategic industries that are able to compete on the global stage.

A similar process has already happened in the French retail and banking industries, where political considerations have been seen to override pure competition issues. The outcome of the battle for Elf could point the way to a wave of consolidation between industries within each European country.

TotalFina believes it is creating a "national champion" - the same phrase used by Michel Pebereau, head of Banque National de Paris, when he unveiled a hostile three-way takeover of Societe Generale and Paribas.

Thierry Desmarest, TotalFina's chairman, had a perfect opportunity to test the government's attitude during an official trip at the end of last week. Mr Desmarest travelled with French Prime Minister Lionel Jospin and finance minister Dominique Strauss-Kahn on a visit to Moscow on Friday.

Mr Desmarest's participation in the trip had been scheduled before TotalFina's decision to launch a hostile bid, but it would have given Mr Desmarest a chance to test the waters with the authorities.

Mr Desmarest said he had approached the authorities and that they were "receptive to the industrial advantages of the deal". "We have every reason to be optimistic," he said.

Mr Strauss-Kahn declined to comment on the deal yesterday, saying the state would give its view in due course. If the government blocked a rival bid on political grounds, it would heighten speculation about mergers elsewhere in French industry.

A leading equity strategist said ministers would prefer to see big consolidations within its national boundaries. "I don't think competition policy will be put in the way of creating major players. You have to think about Peugeot and Renault. If you have two sub-critical French players, what are you going to do? I don't think you are going to consolidate in a cross-border manner.

"There could be pre-emptive moves to stop foreigners getting their hands in the till, so to speak."

But he said the issue was not confined to France. Italy was keener on seeing Olivetti taking over Telecom Italia than control passing to Deutsche Telekom. TotalFina, spurred on by government support for industrial consolidation, initially made friendly overtures. Mr Desmarest said he only launched the unsolicited euro42bn (pounds 27.5bn) offer after these were rebuffed.

"I believe it is necessary to join forces to assure continued solid growth and to take our place as an oil major of the first rank at a time when the industry is restructuring on a global scale," he said. One investment banking source said Mr Desmarest would not have launched the project "with his eyes closed".

Peter Bogin, an analyst with Cambridge Energy Research Associates in Paris, said: "The bidding has just begun. It will be fascinating to see how the battle develops, particularly between the state and the market place. If another suitor steps in - and that seems quite possible - you'll probably see the French government become quite vocal. They would not be keen on a foreign bidder."

Another banking source said: "I'm not sure how keen the French government would be to see the mighty Shell wandering in with its cheque book and buying Elf."

A TotalFina-Elf tie-up would be the latest in a string of mergers and takeovers that has radically changed the structure of the global industry.

The wave of consolidation was triggered by the dramatic slump in the price of Brent crude from $25.33 in December 1996 to a low of pounds 9.73 two years later. BP bought Amoco for $55 in mid-1998, Exxon paid $80bn for Mobil. BP/Amoco has since taken over ARCO for pounds 27bn.

The oil price has since recovered to around $18 but the consolidation has forced the smaller players to seek partners to achieve critical mass. Only last month Elf was outbid in its attempt to buy Saga Petroleum of Norway.

Mr Desmarest said the deal would be good for customers and employees as well as the shareholders who are looking at a 17 per cent premium. He hopes for annual earnings growth of 20 per cent, annual synergies of Ff1.2bn over three years and Ff6bn of divestments.

TotalFina also forecast cutting the combined 142,000-strong workforce by 4,000 but, taking into account the French government's concern for social issues, said there was "no need" for compulsory redundancies.

But analysts said TotalFina's bid did not look like a knock-out blow. Jeremy Elden of Commerzbank said: "This is only the first shot of several manoeuvrings. We await the rest of it. You will see a substantially higher price for Elf than this one, possibly as much as f190 to f200 per share."

However, there was growing suspicion that the deal might be taken out of the hands of the French government by the European Commission. The size of the deal means Brussels is almost certain to take an interest as it has the power to investigate mergers involving a combined turnover greater than Ff5bn (pounds 3.3bn). Although it cleared Total's takeover of Petrofina of Belgium it has since voiced concerns that giant mergers reduce competition in oil exploration.

Last month it launched an in-depth investigation into the takeover by BP/Amoco of Atlantic Richfield of the US, as it did with Exxon and Mobil.