4,000 jobs to go at Texaco

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The Independent Online

US oil company, Texaco, is expected to announce today that it has agreed to a $42bn (£29bn) takeover bid by Chevron, marking the fourth mega-merger in the oil business in two years.

US oil company, Texaco, is expected to announce today that it has agreed to a $42bn (£29bn) takeover bid by Chevron, marking the fourth mega-merger in the oil business in two years.

The deal would join the world's fifth and seventh largest oil players, giving a combined market capitalisation of around $90bn. However, the enlarged company would still trail industry giants Exxon Mobil, Royal Dutch/Shell, BP Amoco and TotalFinaElf.

The deal is expected to yield annual cost savings of more than $1.2bn and cost some 4,000 jobs. Dave O'Reilly, Chevron's chief executive, will lead the combined company, while Peter Bijur, the Texaco chairman, is expected to be offered a key role in the new company.

The US Federal Trade Commission will investigate the proposed merger. It is likely to require disposals, notably in California, where both companies have large petrol station networks. Negotiations have already begun with Shell, on the disposals of Texaco stakes in refining joint ventures it has with the AngloDutch group.

This weekend, Chevron's board approved an offer to swap 0.77 of a share for each of Texaco's approximate 545 million outstanding shares. Based on Friday's closing prices, the deal would value Texaco at $64.87 a share. Chevron will assume Texaco debt of $7bn.

Fred Leuffer, analyst at Bear Stearns, told Reuters: "If there is a merger on these terms, it's a great buy for Chevron. They are certainly paying a very low price for these assets."

Industry analysts weren't surprised by the proposed acquisition of Texaco. Indeed, in 1999, it was widely reported that Texaco had been approached by Chevron with a $70-per-share offer but management of the target company held out for $80.

Bruce Lanni, an analyst with CIBC World Markets, said: "Texaco has been in a precarious position. All their big projects won't be starting until 2002 or 2003, and if oil prices return to more normal levels, they don't have any earnings growth potential over the next two or three years."

That sentiment has seen Texaco's stock barely rise this year despite exceptionally strong oil and natural gas prices. But industry watchers say many of Texaco's problems date back long before last year.

Founded nearly a century ago, the company's largest set-back came in 1983 when it attempted to purchase Getty Oil for $8.6bn.

Rival oil firm Pennzoil had already agreed to acquire Getty, however, and the courts eventually ordered Texaco to pay $10.3bn in damages. Texaco eventually settled for $3bn after filing for bankruptcy protection in 1987.

One long-time industry watcher noted: "It all seemed to start with the Pennzoil problems and the bankruptcy it was plunged into. "The company was weakened and they went into a shrinking mode rather than a growth mode."

The oil price crash of the late 1990s forced Texaco to cut 2,000 jobs, or 11 per cent of its workforce, as the industry reeled from $10-a-barrel oil. Since then, even as prices have recovered, the company has struggled to find new oil reserves, analysts said.

Gene Nowak, an analyst with ABN Amro in New York, said: "Most observers would say their finding record has left something to be desired." As a result, Texaco has been viewed as a likely takeover target, at one point being linked with a bid from Royal Dutch/Shell.

The combined Chevron-Texaco would employ about 55,000 workers, with strong exploration and production positions in West Africa, the former Soviet Union, and Latin America. The enlarged group would have 8.26 billion barrels of oil and gas reserves.

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