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A French Concoction; Totalfina's Acquisition of Elf May Be Only a Prelude

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September 21, 1999, Section C, Page 1Buy Reprints
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Even in France, surrendering to a hostile takeover is not tantamount to the next French Revolution. Nevertheless, Philippe Jaffre sounded eerily like Marie Antoinette.

''I was preparing a cake, but now we have bread,'' said Mr. Jaffre, chairman of the French oil conglomerate Elf Aquitaine S.A. ''It is a good bread, O.K. Now we have to accommodate and make it work.''

Mr. Jaffre is about to lose his job, not his head. Last week, after a two-month takeover battle, he reluctantly agreed to let his company be acquired for $48 billion by its upstart French-Belgian rival, Totalfina S.A.

The deal will bring the end of what was until recently France's state-owned oil company. It will also elevate Thierry Desmarest, the combative chairman of Totalfina, to the top ranks of the world oil industry. The new company, which has yet to be named, will be the world's fourth-largest petrochemical company and will have revenue of about $70 billion.

And once Elf is digested, there may be more. ''In the medium term, I would say that if we have a good opportunity we would try to take these opportunities,'' Mr. Desmarest said in an interview.

But the deal also highlights the fissures that still divide European oil producers. In the wake of mammoth oil mergers around the world, as well as Europe's steady march toward a single market, European oil companies are scrambling to consolidate as well. Yet they remain riven by issues of national pride and their heritage as former state-owned enterprises.

Even before Mr. Desmarest surprised the industry in July by making a hostile takeover bid for Elf, Mr. Jaffre was trying to hammer out a friendly merger with Italy's dominant oil company, Ente Nazionale Idrocarburi S.p.A., or E.N.I.

Those talks failed in part because of skittishness in Italy, where the Government owns a 37 percent stake in E.N.I. But they also ran afoul of the French Ministry of Finance, which adamantly opposed any deal between Elf and a foreign oil company.

Now, as Mr. Desmarest takes command of Elf, many questions remain unanswered. Is it better to be a strong national producer or a European producer? Are more mergers on the horizon? And will Mr. Desmarest be able to deliver the savings and ''synergies'' he has promised?

Mr. Desmarest -- whose corner office in La Defense, the jumbled complex of post-World War II office buildings on the western edge of Paris, provides a clear view of Elf's glass tower just a few blocks away -- is clearly in a rush.

''I would have preferred to start with a friendly deal, but we got the sense that it was urgent because the consolidation in the oil industry was taking place so fast,'' he said. ''If your larger competitors are four or five times larger in terms of market cap, then you are in danger of losing your independence.''

But Mr. Desmarest is far more than a defensive player. Less than two years ago, he was buried deep in the second tier of the world's oil producers as chairman of what was then simply Total S.A. The company was a distant second in size to Elf, which had once been France's state-owned oil company.

All that changed abruptly last December, when Mr. Desmarest carried off a brash deal to acquire the Belgian company Petrofina S.A. in a stock transaction worth $11 billion.

The deal dramatized the contrast between Mr. Desmarest's buccaneering penchant for risk and Mr. Jaffre's focus on fiscal orthodoxy. Mr. Jaffre, at Elf, had been negotiating with Petrofina and its biggest shareholder, Albert Frere. But Mr. Jaffre balked at Mr. Frere's demands on price and the talks bogged down last fall.

Sensing a major opportunity, Mr. Desmarest began his own talks with Mr. Frere last June and soon reached a deal to pay what was then a 40 percent premium over the market price for Petrofina. The takeover, which was completed this summer, suddenly catapulted Total to a size bigger than Elf. The new Totalfina had sales last year of 35 billion euros, or $36.3 billion, compared with 32.2 billion euros, or $33.5 billion, at Elf.

Mr. Jaffre was convinced that Total was wildly overpaying. ''It was an unacceptable price to me,'' he said in an interview here. ''It would have been destroying shareholder value.''

Many investors were rattled as well. Totalfina's stock slumped badly in the first six months of this year amid anxiety that the shares had been too heavily diluted.

But most analysts believe Mr. Desmarest viewed the deal more as a stepping stone toward a much bigger target -- the takeover of Elf itself.

Mr. Desmarest demurred on that question. As it happened, however, Totalfina began its unsolicited takeover bid for Elf on July 5, just one working day after Total and Petrofina formally completed their exchange of shares.

The hostile bid apparently caught Elf executives by surprise. Executives on both sides confirmed that Mr. Jaffre had been pinning his hopes on a deal in Italy with E.N.I.

The advantages, according to those who supported such a deal, were that the Italian company had many exploration and production sites in the same parts of Africa as Elf, particularly in Libya, Gabon and the Congo.

Mr. Jaffre also believed, executives said, that a cross-border deal would form the start of a more European network.

But Mr. Desmarest, willing to take the plunge when Mr. Jaffre deferred, won points for boldness. When worldwide oil prices abruptly jumped earlier this year, his acquisition of Petrofina suddenly looked much cheaper and smarter and Totalfina's shares recovered their lost ground.

Elf was also plagued with image problems thanks to a series of scandals under the company's previous chief executive, Loik le Floch-Prigent.

Mr. Jaffre, who took over in 1993, put Elf through a painful overhaul accompanied by big reductions in staff and the sale of poorly performing businesses. Yet Elf still had a reputation as sluggish and bureaucratic, while Total had burnished its image as a fully private enterprise that was more competitive and responsive to shareholders.

Perhaps most important, Mr. Desmarest had strong support from the French Government. Before starting his takeover attempt, he outlined the plan to the French Finance Minister, Dominque Strauss-Kahn, as well as to Prime Minister Lionel Jospin.

Mr. Desmarest, according to the French newspaper Les Echos, actually accompanied Mr. Jospin on a trip to Moscow to get his ear.

Because both Mr. Strauss-Kahn and Mr. Jospin were eager to promote a French national champion, they quickly blessed Total's offer and quietly cautioned Mr. Jaffre against looking for a foreign partner that could serve as a white knight.

In effect, Mr. Jaffre was trapped. Though Elf began a so-called Pac-Man defense -- a counteroffer to take over Total for about $52 billion worth of Elf stock -- institutional investors strongly preferred Mr. Desmarest's deal. That was because the premium offered by Elf was based largely on the run-up in its own share price as a result of the Total bid.

''There is no way that any institutional investor would have taken the Elf offer,'' one analyst said.

To his credit, Mr. Jaffre forced Mr. Desmarest to raise his original offer from $42 billion to $48 billion.

Under the deal announced Sept. 13, Mr. Jaffre will step down as soon as the merger is complete and Mr. Desmarest will take over.

Most analysts say the new company will be able to significantly slice its costs in refining and sales. The two companies each have three refineries in France and numerous others elsewhere in Europe. They also have more than 12,000 service stations across Europe, half of them in France.

Yet the potential savings promised by Mr. Desmarest are surprisingly modest -- slightly more than $1.5 billion. In deference to French Government objections to job reductions, the company plans to eliminate only 2,000 of the 65,000 people it employs in France and another 2,000 others worldwide.

Most experts assume Mr. Desmarest will have to shut down at least one refinery in France and perhaps others around Europe. But that will ignite a storm of protest, and Elf has already been plagued with strikes this year.

''Most people believe the potential savings are well above two billion euros,'' said Nick Davies, an oil industry analyst at J. P. Morgan. ''The difficulty is knowing how long it would take to deliver those savings.''

Mr. Desmarest says he is merely being conservative. ''We had a very strong conviction that this was the right fit, the right choice,'' he said.

Even after the merger, Totalfina will hardly have a lock on the market. The combined company would have about 27 percent of the gas stations in France and about 12 percent of the European retail market as a whole.

The new company's daily production, about two million barrels a day, would be about half that of the proposed merger between Exxon and Mobil.

To some extent, Mr. Desmarest is betting on the future strength of oil prices. His plan calls for raising oil production 6 percent a year, three times the pace of the market as a whole. The plan assumes that oil prices, which have soared to more than $22 a barrel from $10 since the beginning of this year, will stabilize somewhere about $15 or $16 a barrel.

Analysts, meanwhile, are convinced Mr. Desmarest is hungry for other oil companies, and speculation remains intense about a deal with E.N.I. or perhaps Compania Espanola de Petroleos S.A. of Spain, known as Cepsa, in which Elf holds a minority stake.

But it remains unclear if such deals are feasible. Elf and E.N.I., for example, had comparable stock market capitalizations and could have pursued a politically palatable merger of equals. But Elf-Totalfina will be much bigger, which could easily raise national hackles in Italy about a foreign takeover.

Mr. Desmarest, now that he has raced to swallow Elf, said he was no longer in such a hurry. Outside of North America, where the French companies have little presence, his company has power comparable to the new supermajors like BP Amoco or the proposed Mobil-Exxon combination.

''It is not absolutely necessary for us to have another big phase of consolidation,'' he said.

Mr. Desmarest showed little interest in American companies like Chevron or Texaco, which have been left out of the recent mergers.

Indeed, Totalfina plans to sell off Petrofina's network of American gas stations.

But once Elf is digested, he may be interested in further acquisitions. Meanwhile, some analysts are quietly worried that Elf-Totalfina may already be stretched too thin. Elf is a big producer and refiner in Africa, while Totalfina is a big producer in the Middle East, Indonesia and South America. Though that provides a huge portfolio of reserves, it could also prove unwieldy.

''Management has got to show us it is up to the job,'' said Sue Graham, an industry analyst at Merrill Lynch in London. ''It is not a question of being able to compete. It's a question of management realizing that it has a different sized company. Can it face up to the fact that some of the assets no longer belong there?''

Mr. Jaffre, looking gaunt and weary in the wake of his unsuccessful battle against Mr. Desmarest, says he would have liked another outcome.

''My first choice for Elf was making it a European champion, not a French champion,'' he said. ''With another European company, the synergies would have been greater.''

A version of this article appears in print on  , Section C, Page 1 of the National edition with the headline: A French Concoction; Totalfina's Acquisition of Elf May Be Only a Prelude. Order Reprints | Today’s Paper | Subscribe

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