Oil rivals in talks on pounds 2.3bn merger

ENTERPRISE OIL yesterday confirmed it was in merger talks with Lasmo, the arch-rival it failed to take over four years ago. If agreed, the merger would create an independent energy group with a combined market value of pounds 2.3bn.

Lasmo yesterday confirmed it was in discussions with Enterprise but said the outcome of the talks was still uncertain as a merger with Enterprise was only one of several options under consideration. The group is also in talks with other potential partners, including several oil giants.

"Lasmo is in discussions with a number of parties on a range of strategic initiatives, one of which is an evaluation of a possible merger with Enterprise Oil," the company said in a statement.

The talks began in December when Sir Graham Hearne, chairman of Enterprise Oil, began talks with his old rival Joe Darby, chief executive of Lasmo. Sir Graham's approach to Lasmo comes more than four years after Enterprise launched a disastrous pounds 1.7bn hostile takeover bid for Lasmo.

The talks between Enterprise and Lasmo are still at an early stage. Enterprise said it was engaged in "exploratory discussions which may or may not lead to a merger between the two companies".

Any merger would be on the basis of current market valuations. Enterprise is valued at pounds 1.4bn in terms of market capitalisation, while Lasmo is valued at pounds 910m.

The future positions of senior executives on both sides has not yet been discussed. Enterprise is said to be dismayed that news of the talks has already leaked.

Both Enterprise and Lasmo have also been in talks with other parties, including oil majors of a similar size to BP/Amoco, though these are not thought to include a full takeover.

A successful merger between Enterprise and Lasmo would conclude a saga which began with an acrimonious bid battle in 1994. Then, after an angry war of words, Enterprise's pounds 1.7bn bid for Lasmo failed to gain shareholder approval and left Enterprise, which had built up a 7 per cent stake in Lasmo, with a large paper loss.

Sir Graham Hearne, then chief executive and chairman, was forced to split his role and find a new chief executive. Many observers blamed Warburg's, Enterprise's advisers, for the debacle.

The reconciliation between Enterprise and Lasmo has been prompted by the slump in world oil prices in the second half of 1998. At $11.73 a barrel, nearly $7 cheaper than in 1997, the oil price is lower than it has been for 10 years.

The oil price slump has called into question the value of oil exploration projects planned by the two companies. Shares in Enterprise have more than halved this year from 604p to 283p. Shares in Lasmo have sunk by more than 70 per cent, from a May high of 297.5p to 94.25p on Friday.

Amid rumours of a cash crisis, Lasmo last week issued a statement insisting its share price was unjustified and denying rumours of a forthcoming rights issue. In its 1999 projections, the company is banking on an average price of $13 a barrel.

The company said its balance sheet was in good shape. It had a current cash balance of pounds 550m, pounds 150m in undrawn facilities, and gearing was 54 per cent.

In November, Lasmo said it was cutting 60 per cent of the staff at its London head office - 300 jobs. The company said it was concentrating on safer exploration projects and aiming to cut its costs by pounds 30m.

News of the talks underlines the mounting pressure for consolidation in the sector owing to the slumping oil price.