Reaching for Conoco's Riches

By Charles Alexander

Four corporate giants in the wildest merger whirl ever

The contest for control of Conoco, the energy company laden with 1.7 billion bbl. of oil reserves, 3.8 trillion cu. ft. of natural gas and 14.3 billion tons of coal, whirled on last week at a billion-dollar pace. The opponents: Du Pont, the largest U.S. chemical producer; Seagram, the world's biggest liquor distiller; Mobil, the second largest American petroleum company; and Texaco, the third-ranking oil firm. As the price for Conoco whirled higher and higher, the contestants launched a global financial free-for-all and corralled almost $20 billion in standby credit at multinational banks from New York to Tokyo.

Two weeks ago, Conoco revealed that Du Pont was its choice as a partner. After five days of frantic negotiations capped by a midnight meeting on July 5 between Conoco Chairman Ralph Bailey and Du Pont Chairman Edward Jefferson, the two companies agreed to merge. Jefferson offered $7.3 billion, or an average price of $84.20 per Conoco share. The deal seemed to save Conoco from an unwelcome takeover bid from Canada's Seagram, which had offered $73 per share for about 41% of the oil company's stock. Conoco had also spurned an $85-per-share bid from Texaco, largely out of fear that federal trustbusters might block a union of two huge oil firms.

Instead of ending the affair, however, the Du Pont-Conoco merger announcement merely unleashed a new flurry of financial maneuvering. Within four days, Texaco quietly arranged $5.5 billion in credit from a group of banks led by Chase Manhattan. Pundits speculated that Texaco was gearing up to boost its bid for Conoco or pursue another oil company. Meanwhile Edgar Bronfman, Seagram's tenacious chairman, was mulling his own countermove. He called his board of directors into a special session. The verdict: up the ante. The new offer: $85 per share for 51% of Conoco stock.

Du Pont's top officers immediately huddled at their Wilmington, Del., headquarters to size up the new Seagram challenge. During a marathon session in the walnut-paneled executive committee room, Chairman Jefferson exhorted his troops: "Du Pont is a strong company, and we're going into this thing to win."

Then still another bidder joined the action. Mobil put together a $5 billion credit package, and Chairman Rawleigh Warner Jr. issued a statement leaving little doubt that his company was poised to pounce. Said he: "We know Conoco and the business it operates. Conoco is a great company with fine resources and excellent management and personnel." Surprisingly, Warner's message shrugged off possible Government objections, saying, "Preliminary studies indicate that a Mobil-Conoco merger would not create difficulties under existing antitrust guidelines."

Rather than wait for Mobil's move, Du Pont launched a pre-emptive strike. Chairman Jefferson called Conoco's Bailey with a sweetened offer: $7.6 billion, or $86.19 per Conoco share. At the same time, Du Pont went back to its banks to boost its line of credit from $3 billion to $4 billion in case it needed more money to capture Conoco.

After Du Pont's new offer, an uneasy and temporary lull settled over the competition. Explained a top financial adviser to Seagram's Bronfman: "We're just going to sit back for a while and see what happens." But then, after three days of waiting, Mobil moved. It offered $7.7 billion, or $90 per share. The other bidders immediately returned to their calculators to plot their next ploys.

In the end, Conoco shareholders will determine whose offer wins. Though Mobil's bid is now the highest, analysts still believe that Du Pont has the best chance because of the antitrust uncertainty surrounding the oil firm's offer. Says Garo Armen, of the E.F. Hutton investment firm: "Du Pont has the edge even though Mobil's offer is higher. Seagram is out of the running on price."

Seagram's chances also received a blow last week when Conoco announced that it had received a warning letter from the Arab state of Dubai, where the firm pumps nearly a fourth of its oil supply. The letter said that Conoco's production in Dubai would be in "grave jeopardy" if the company were acquired by Seagram. Dubai's displeasure was seemingly caused by Bronfman's position as president of the World Jewish Congress.

The bidding for Conoco continues to rise because of the company's huge treasure chest of natural resources. Conoco has oil drilling rigs from the Gulf of Mexico to the South China Sea, coal mines from West Virginia to Alberta, natural gas wells from Texas to the North Sea and uranium deposits from New Mexico to Niger. Since the first oil price explosion in 1973, the value of Conoco's assets has soared from $2.6 billion to $14 billion. The firm's oil and gas holdings alone have a value of $2.3 billion on Conoco's books, but experts say that they are actually worth as much as $9.3 billion. Even at $90 per share, the oil firm is a bargain. Some analysts calculate that Conoco shares are worth more than $140.

Conoco is not the only resource-rich firm that is ripe for acquisition. High interest rates have depressed the price of stocks, including the shares in many energy and mineral companies. Speculators suffering from what Wall Streeters call the Conoco syndrome are now swarming to buy shares of corporations they think will be the next takeover targets. Their favorites seem to be medium-size oil companies. In the past two weeks, the price of Cities Service stock has surged by 12%, Marathon Oil shares by 19% and Kerr-McGeeby 17%.

Many of the coveted companies moved swiftly last week to protect themselves from a takeover. Cities Service has lined up $1 billion in standby credit, possibly to enable it to buy back a chunk of its own stock in the event of an unwanted merger bid. Marathon Oil has arranged to borrow up to $5 billion. Analysts think that Marathon might be preparing to buy another company and thus become too big to be easily swallowed. Even Gulf, the fifth largest U.S. oil company, announced a plan last week to protect itself by buying up 5% of its own stock.

Attractive companies have felt ever more vulnerable since President Reagan took office. When the new Attorney General, William French Smith, asserted that "bigness is not necessarily badness," merger makers saw his words as a green light to corporate takeovers. If the present torrid pace of acquisitions continues, U.S. companies could spend $70 billion this year to absorb more than 2,000 other firms. Says Robert Lekachman, professor of economics at New York's Lehman College: "The Reagan Administration has unleashed the wildest collection of mergers and takeover events since Napoleon conquered most of Europe."

The merger binge has brought protests from several prominent Democrats on Capitol Hill, including Senators Edward Kennedy and Howard Metzenbaum. Says Metzenbaum: "If Mr. Reagan wants to eliminate the antitrust laws, he ought to come up here with legislation, not skulk around accomplishing the same thing through inaction." Republican Senator Strom Thurmond promised last week that his Judiciary Committee would hold hearings on the Conoco question.

At the Justice Department, Antitrust Chief William Baxter seemed to backpedal a bit from the Administration's big-is-beautiful stance. Said he: "If the companies think we're generally soft on mergers, they're going to be in for a big surprise.'' Baxter stressed that while the Government was generally receptive to so-called vertical mergers of firms in different businesses, it would look skeptically upon horizontal combinations that might seriously reduce competition within an industry.

Yet many Washington antitrust experts, including some within the Justice Department, predict that the Government will ultimately approve a merger between Conoco and one of its suitors--even Mobil or Texaco. They point out that contrary to conventional wisdom, the oil industry is highly competitive. Under present antitrust guidelines, the Government considers an industry to be exceedingly concentrated if four or fewer firms control 75% of the market. In the oil business, the top four companies account for less than 20% of sales. By contrast, four auto firms control 70% of the market, while four steel companies have 44% of that business, and four corporations have 58% of all aluminum sales.

The acquisition of Conoco by even one of the biggest oil companies would not drastically alter the industry's balance of power. In the case of retail gasoline sales, for example, neither a Texaco-Conoco nor a Mobil-Conoco combine would hold more than 7.4% of the market. Observes one Administration antitrust lawyer: "It wouldn't be like Ford and General Motors merging."

No matter who eventually wins the battle for Conoco, the whirl of mergers in the oil industry is likely to continue. The losers of the current campaign will still be left with billions in cash or bank credit to buy up other companies, and natural-resource firms will probably be the first targets. The struggle for petropower has barely begun.

--By Charles Alexander. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York

With reporting by David Beckwith, Frederick Ungeheuer

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