- The Washington Times - Tuesday, October 17, 2000

SAN FRANCISCO Chevron Corp.'s proposed $34 billion purchase of Texaco Inc. would create the world's fourth-largest publicly traded oil company, though not before the combined entity makes a number of significant divestitures to satisfy regulatory concerns.

"There are going to be some considerable challenges to getting this deal done" because of antitrust concerns, predicted Tyler Dann, an oil-industry analyst with Banc of America Securities in Houston. "They need to take a preemptive strike and sell assets to satisfy regulators as soon as possible or it could turn into a real political football."

Mr. Dann and other industry analysts still expect the new company, dubbed ChevronTexaco Corp., to win regulatory approval in six to 12 months after selling several refineries and hundreds of gas stations, primarily in the West and the South.

Without divestitures, ChevronTexaco would control 40 percent of the West Coast retail market and one-third of the region's refinery capacity.

In the District of Columbia, Maryland and Virginia, the two companies own 887 stations. Texaco has eight stations in the District; Chevron has three. In Maryland, Texaco has 178 and Chevron 37.

Locally, both companies' biggest presence is in Virginia, where Texaco has 434 stations and Chevron 227. By comparison, in California, where both companies are prominent, Texaco has more than 500 stations and Chevron more than 1,400.

It's not clear yet how many of the local gas stations will have to be sold, company officials said.

The new company will trim about 7 percent of its work force about 4,000 workers to help it achieve what it estimates are annual savings of $1.2 billion.

Assuming the deal goes through, San Francisco-based Chevron and White Plains, N.Y.-based Texaco will still lag far behind the so-called "super" majors Exxon Mobil Corp., Royal Dutch/Shell Group and BP Amoco PLC, which have muscled up through huge mergers in recent years.

Analysts suspect ChevronTexaco will find the rules of the game have changed dramatically since the first wave of oil-industry deals in 1998.

Back then, oil prices were declining to their lowest levels in a generation. Through most of this year, oil prices have been climbing steadily, driving gas prices to record highs in some parts of the country and resulting in increased political pressure to get things under control.

"The pressure is building on oil companies. This deal is going to get a lot of scrutiny," said Stephen Smith, an analyst with Dain Rauscher Wessels in Houston. "The amount of attention given a merger when gas is $1.20 per gallon is not the same amount of attention given when it's approaching $2 per gallon. It's going to be a much tougher climate."

When regulators finally approved Exxon Mobil last year, it had to sell nearly 2,500 gas stations, primarily in the East, and a large oil refinery in Benicia, Calif. BP Amoco had to sell prized holdings in Alaska to buy Atlantic Richfield Co.

Chevron Chairman David O'Reilly, who will be CEO of the combined company, said executives are prepared for an extensive government review of the merger and will cooperate with antitrust regulators.

He thinks the soaring cost of gasoline improves prospects for quick approval because recent shortages demonstrated "the acute importance of energy to the United States' well-being."

"I think this is a politically good time to address the issue," Mr. O'Reilly said yesterday during a news conference. "We will be able to provide energy to U.S. consumers in a better way than we could have done separately."

Analysts regard Chevron and Texaco as a good fit because they have many complementary operations internationally, including West Africa and Brazil, home to some of the world's largest new oil fields.

Although rivals, the two companies have a long business together. For the past 65 years, they have co-owned a joint venture called Caltex Corp., which sells 1.8 million barrels of crude oil and petroleum products per day and operates in 55 countries.

Chevron tried to buy Texaco last year, but those talks unraveled over disagreements about price and issues of control. Texaco CEO Peter Bijur reportedly wanted to run the combined company a demand rejected by Chevron's then-CEO, the often acerbic Kenneth Derr.

After Mr. Derr retired at the end of 1999, Mr. O'Reilly took over as Chevron's CEO, paving the way to reopen talks with Texaco. Texaco's stock also had been lackluster since breaking off its talks with Chevron in June 1999, putting Mr. Bijur under greater pressure to find a way to improve shareholder returns.

Texaco probably had little choice but to accept Chevron's offer because the company "is considered damaged goods in the sense that it hasn't performed as well as its rivals," said Eugene Nowak, an analyst with ABN Amro in New York.

"A year ago, the situation was just not right for a deal," Mr. Bijur said yesterday. "The industry continues to evolve and we continue to evolve with it."

Mr. O'Reilly, 53, will be chairman and chief executive officer of ChevronTexaco, which will remain based in San Francisco. Mr. Bijur, 58, will be vice chairman.

Chevron will exchange 0.77 of its shares for each Texaco share, roughly the same ratio that it offered Texaco in 1999. Chevron also will assume roughly $8 billion in debt.

In trading yesterday on the New York Stock Exchange, Chevron's stock fell $2.25 to $82 while Texaco's shares gained $3.88 to $59, lowering the value of the deal from its initially announced $35 billion.

The deal still leaves a significant gap between the combined company and the largest U.S. oil company, Exxon Mobil, which had 1999 sales of $160.9 billion. Chevron had 1999 sales of $31.5 billion, while Texaco had sales of $35 billion last year.

Chevron and Texaco still need to get approval from their respective shareholders, as well as federal regulators.

• Kristina Stefanova contributed to this report in Washington.

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