BP/Amoco merger creates third

'supermajor'

How BP Amoco ranks among majors [98,463 bytes]

BP Amoco operations vs. other majors [106,786 bytes]

In a move characterized as the "largest ever industrial merger," British Petroleum Co. plc and Amoco
Corp. have agreed to unite their businesses on a global and comprehensive basis.
The combined firm, to be based in London, will be the U.K.'s biggest company. BP will hold a 60%
equity interest, and Amoco 40%.
Called BP Amoco plc, the firm will be "one of the most comprehensive and competitive energy and
petrochemical enterprises in the world," according to Amoco. The merger catapults BP and Amoco into
the ranks of the top three energy majors, along with Royal Dutch/Shell and Exxon Corp.
"BP Amoco moves into the top three within the industry in most all statistical, operating, and financial
categories," said Amoco Pres. William Lowrie. "With a combined market capitalization of about $110
billion, we will be among the 15 largest publicly traded companies in the world.
"Work already done indicates we can realize operational synergies and cost savings of at least $2
billion, pretax, annually by yearend 2000, with more upside beyond," added Lowrie. "These savings are
in addition to the improvements already targeted by the separate organizations."
Amoco's Chicago headquarters will become headquarters for BP Amoco's North American refining,
marketing, and transportation business, and eventually for its global chemicals business. Exploration
and production operations for the Western Hemisphere will be managed from Houston, where both
partners have offices.
Over time, all BP retail outlets in the U.S. will adopt the Amoco brand name. BP retail sites outside the
U.S. will continue to carry the BP name.
The merger has been approved by both companies' boards. It now awaits shareholder approvals and
regulatory clearances.
(For late-breaking news developments on this story, see this issue's Newsletter.)

Synergies
Lowrie expects both firms to benefit from their complementary strategic and geographic strengths. He
also believes the diversified business portfolio of the merged company will support performance during
down cycles.
Upstream, BP is the largest oil producer in the U.S. and in the U.K. North Sea, while Amoco is the
largest private natural gas producer in North America and the second largest gas reserves holder.
Downstream, BP has refineries in the U.K., France, Spain, the U.S., Australia, South Africa, and
Singapore. Amoco has five U.S. refineries with a total capacity of about 1 million b/d.
BP's European refineries that are involved in its joint venture with Mobil Corp. are excluded from the
merger with Amoco. Chase said the BP-Mobil joint venture is "completely unaffected" by the merger.
BP also has almost 18,000 service stations worldwide; Amoco has 9,300, all in the U.S.
In the chemicals arena, BP produces about 9.4 million metric tons/year of various chemical products
(see table, p. 35 [265,090 bytes]). It is a leading producer of polyethylene in Europe and supplies more
than 90% of the acrylonitrile technology in use worldwide. It is also one of the largest manufacturers of
styrenics in Europe and a leading producer of polybutene there.
Amoco has about 13 million metric tons/year of chemicals capacity. It is the world's largest producer of
purified terephthalic acid (PTA), paraxylene, polybutene, and poly alpha-olefins. It also is a major
producer of linear alpha-olefins and polypropylene.

Analysts' view
Adam Sieminski, of BT Alex Brown, Baltimore, said, "This makes for a very interesting, very sizable
company. It puts BP-Amoco in competition with Exxon Corp. and Royal Dutch/Shell for sheer size. It
makes them one of the supermajors."
He said some mergers are intended to overlap operations to improve market share in regions, but this
one is purely complementary.
"It makes Amoco less sensitive to natural gas and chemicals and BP less sensitive to crude oil, making
a better-balanced company than BP or Amoco were alone.

"There have been huge consolidations in other industries, but not the major international oils. This
probably means the wave of consolidation that prior to this had escaped the major companies may be
under way.
"The next question is whether Mobil Corp., Chevron Corp., ARCO, and Texaco Inc. will be content to be
in the second tier."
Philip Verleger, of PKVerleger LLC and Brattle Group, Boston, said, "This is a really competitive industry.
This merger strikes me as exactly what has to happen, and I think we will see more of them. This is
really where the productivity gains of the industry can be achieved."
Verleger added, "Every other sector of the economy has seen larger mergers than this in the past
several years. Regulators are taking the view that bigness isn't necessarily bad, and the companies
have seized on this and tried to achieve some productivity gains."

Merger motivation
Other oil industry analysts agreed that BP and Amoco's operations were complementary.
John Lichtblau, president of the Petroleum Industry Research Foundation, New York, said, "There's some
logic to the merger when you look at it. It gives BP access to the U.S. natural gas market, because
Amoco is a big gas producer, while BP has no gas here. It gives Amoco access to huge oil supplies
overseas and in Alaska. And downstream, it gives BP access to the U.S. market more than it has now.
"I think they will combine their operations in the U.S. very rapidly," he added.
"It could be a good marriage. Each one has something that the other one doesn't have."
Lichtblau said the merger would have no impact on competition in the U.S. "Even the combined
company isn't that big, in terms of dominating the market."
He added, "With oil prices as desperately low as they are now, anything that the industry does to
survive should be accepted," by federal regulators.
Lichtblau conjectured that the merger "may be somehow connected with very low oil prices, which are
likely to stay for a while," although neither BP nor Amoco mentioned the recent oil price climate as a
reason for their decision.
"The motivation to cut costs is bigger when profits decline," added Lichtblau, "and that has been very
much the case for both of these companies. You may see others follow suit."
Cyrus Tahmassebi, of Energy Trends Inc., Bethesda, Md., contends that the merger was forced by low
prices and a very competitive retail market.
"The objective here is to reduce costs, stay competitive, and increase shareholders' value. There's a
tremendous amount of pressure on companies to show better performance. With the current low oil
prices and lower refining margins, what else can they do except try to reduce their costs?"
Tahmassebi said, "In the old days, if the downstream was bad for the integrated companies, they could
make money upstream.
"This tells me that what the companies see for the upstream today might be around for some time."

The deal
The merger was characterized by Amoco as "completely friendly." The two firms had been doing
business together for some time.
Lowrie said, "We've had a lot of involvement and relationships over the last several years with British
Petroleum-the big transaction we did in Azerbaijan. We followed that up by bidding jointly in Venezuela
on the exploration blocks down there.
"I think our values and our approach to doing business is very common," added Lowrie.
Chase said the companies had worked together a great deal, and their relationship just developed. He
said the participants have been unable to pinpoint who first suggested the idea of a merger: "It just
happened."
Under terms of the deal, Amoco will be merged into BP, with BP shareholders having about 60% of the
combined entity, and Amoco shareholders about 40%.
Amoco shareholders will receive 3.97 BP ordinary shares for each Amoco share held at closing. The
shares will be delivered in the form of BP Amoco American Depository Receipts (ADRs). Each ADR will
represent six BP ordinary shares.
Expressed in terms of ADRs, each Amoco share will fetch about 0.66 ADR. The exchange is expected to
be tax-free.
The merger will be accounted for on a pooling-of-interests basis. BP will report its results in U.S. dollars
under U.K. generally accepted accounting principles (GAAP), with supplementary U.S. GAAP
information.
The merged firm will be governed by a team composed of members from both companies. Amoco
Chairman and CEO Laurance Fuller and BP Chairman Peter Sutherland will be cochairmen of the board
of BP Amoco. BP CEO John Browne will be chief executive.
Browne also will chair the management committee, with Fuller as deputy chairman.

"The two will co-chair the transition team responsible for integrating the operations of the new group,"
said Lowrie. "Larry (Fuller) then plans to retire in the year 2000."
Chase and Lowrie will be deputy chief executives and copresidents of BP Amoco. Chase will be
responsible for exploration and production, and Lowrie will direct refining, marketing, and chemicals
activities.
The synergies are going to be linked to the compensation structures of the management team to
ensure the delivery of new shareholder value, said Chase.

Expected closing
The firms hope to conclude the deal by yearend.
"There will be clearances required," said Lowrie. "We don't anticipate any significant problems," he
added. "There may be some minor antitrust issues on the marketing side in certain markets here in the
United States, but those are easily dealt with, we believe."
Sieminski said BP Amoco might have to sell a few minor assets to meet antitrust objections. "The
biggest issue is going to be refining and marketing in the Midwest, where both BP and Amoco have
operations."
Verleger agreed: "It's a very natural merger. The two companies have very little overlap. There's some
in the Midwest (U.S.), but the gasoline market is very competitive there, anyway.
"If the Justice Department and the Federal Trade Commission apply the same merger guidelines to oil
that they apply to everything else, there should be no problems."
Chase expects the necessary European clearances to be easier to obtain: "The European situation is
going to be very, very straightforward here-nothing like the situation that we had when BP and Mobil
were trying to put together our downstream operation.
"We've looked at this very hard with people whoellipsehave had a full year's experience of getting
clearance for the last deal with Mobil, and we are tremendously confident that the European end of this
does not represent a hurdle at all."
Lowrie said, "This transaction will propel the combined enterprise into the top tier of the industry
immediately on essentially all statistical measures. But looking ahead, it does more than that: it
creates the platform from which we can grow into a position of clear industry leadership.
"Over the long term, we believe that size, scope, and global reach are critical in dealing with the
opportunity and challenges in our industry. Sheer size helps in our industry, in terms of capturing
growth opportunities, in achieving economies of scale, and in insulating us from the temporary
downturns that occasionally hit our industry.
"The market apparently agrees, judging from the generally higher price-earning multiples accorded our
two largest competitors."