Company Of The Week: BP Amoco

BP Amoco, the giant British oil company, has agreed to pay $26.8bn in stock for Atlantic Richfield. The deal means the new company will be the largest oil refiner and producer in the US.

BP Amoco will exchange 0.82 of an ADR for each Arco share. The bid, which Arco recommended shareholders accept, represents a 26 per cent premium to the company's $21bn market value last Friday, before the two confirmed they were holding talks.

The transaction is the fourth major acquisition in the oil industry since August, when BP agreed to buy Amoco for $62bn - the biggest merger completed to date and the first major takeover in the oil industry since 1984.

BP Amoco said the Arco purchase would generate pretax savings of $1bn by 2001, helping the two cope with a two-year slump in oil prices.

"They both drill in Alaska so they could probably cut costs there," said Simon Toynbee at Majedie Investments. BP Amoco will take a $1bn charge to pay $400m in tax to the UK as a result of the transaction, which will be accounted for as an acquisition.

The charge also will cover the costs of cutting 2,000 positions to achieve the savings. BP Amoco employed 96,650 people and Arco had 18,400 employees at the end of 1998.

The savings BP Amoco identified at Arco are in addition to $500m of cost cuts Arco said last year it would make. For BP Amoco, the purchase would add to $2bn of cost savings planned after the Amoco purchase.

For Arco, the buyout would end years of efforts to replace its aging Prudhoe Bay field in Alaska, which accounts for 22 per cent of its oil output.

For BP Amoco, Arco adds big new natural gas projects in Asia, which had been the weakest region within the BP portfolio.