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BP Amoco Acquires Arco

After days of anticipation, BP Amoco on Thursday confirmed that it is indeed buying the Los Angeles-based Atlantic Richfield Company - Arco - for $26.8 billion.

The deal, which will make the two companies the second biggest force in the global oil industry, will create a company with a market capitalization of $190 billion. BP Amoco (BPA) said it will generate pretax synergies of $1 billion by 2001.

The all-share transaction, approved by the boards of both companies, will involve the exchange of 0.82 BP Amoco American depository shares for each Arco (ARC) share.

The company also plans to shed some $3 billion in assets. Speaking at a press briefing after the announcement, chief executive Sir John Browne said most of those asset sales would be "upstream" - meaning sales will include assets tied to exploration.

The U.K. oil giant said the deal will give it the largest oil output of any non-state company. The deal will also consolidate the company's position in Alaska, "where the resulting synergies and cost-savings are likely to increase the region's competitiveness and significantly encourage future investment."

Browne said "the prize in Alaska is considerable." The merger will, among other things, cut cash costs by around 80 cents a barrel. He also moved to diffuse concerns that the company's latest empire-building exercise will be anti-competitive for the region - something which has concerned analysts.

"This is pro-competitive not an anti-competitive move; we're making sure nothing is done to reduce the level of interest the industry has in exploration in Alaska," he told journalists.

John Buchanan, the group chief financial officer, said there was overall scope for improving performance and expanding the company's reach. He said the growth areas were particularly focused in the Far East.

The merger will also have its costs. BP Amoco will take a restructuring charge of $1 billion and will cut 2,000 jobs, with 15 to 20 percent being axed in Alaska. The company said another 200 jobs will go in Southern England.

BP Amoco employed 96,650 people and Arco had 18,400 staff at the end of last year. The charge covers a $400 million stamp duty reserve tax charge and the costs tied with squeezing out the synergies of the deal.

While there will be staff overlap, Browne said there won't be any overlap regarding the assets of his company and that of Arco. He also said the merger will be earnings accretive as long as the price of oil remains above $10 a barrel. The price of oil has been surging over the past couple of weeks.

On the New York Mercantile Exchange Wednesday, May crude closed at $16.76 a barrel. While the price closed down 4 cents on the day, that is still significantly above the more recent lows of roughly $12 a barrel. While analysts are mixed in their belief about the staying power of the oil price, there are many who think it has a good chance of hovering around $15 a barrefor some time to come.

Meanwhile, Browne also said that its latest mega-purchase won't interfere in anyway with its integration with Amoco Corp., which it bought for $62 billion in August. He said the company still has to get regulatory approval, admitting that there are "challenges." But most analysts have not expressed concerns about any serious hurdles.

The board of the merged company, which will be called BP Amoco, won't include any Arco directors. Browne said Arco approached his group in January to talk about the possibility of a takeover by the British group.

BP Amoco's shares fell 1.85 percent, or 20 pence a share to 1028.5 against a broadly higher London market. Traders and analysts said the loss was partly induced by profit-taking, as BP Amoco's shares surged 5 percent earlier this week.

Written By Suzanne Miller, London bureau chief for CBS MarketWatch

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