PARIS, SEPT 14: Abruptly ending their acrimonious two-month takeover battle, TotalFina SA and Elf Aquitaine SA surprised markets Monday by announcing they had agreed to a friendly merger that turns the combined concerns into the world's fourth-largest oil company.The agreement came after TotalFina sweetened its all-share-bid for Elf by 9.2 per cent, raising the value to $48.7 billion (47 billion euros), offered vague promises to look more closely into a more aggressive industrial plan for the newly merged group's chemical activities, and agreed to equal representation by TotalFina and Elf on the merged group's executive committee and board. Elf chairman Philippe Jaffre, though, said he will step down as soon as the merger is completed, leaving the giant in the hands of TotalFina chairman Thierry Desmarest.The negotiated outcome cuts short what promised to be an epic European takeover battle and also marks a triumph for Desmarest. Not only is the final agreement tailored along the lines of Desmarest's strategic project - Jaffre, in launching a reverse takeover bid for TotalFina, sought a demerger of chemical assets - but the move caps TotalFina's transformation from also-ran to oil major. Through the takeovers of Belgium's Petrofina last year and now Elf, Desmarest creates France's biggest company in terms of stock-market caitalisation, with a value of more than 95 billion euros, and propels TotalFina into the top ranks of the global oil business as the sector consolidates."About two-thirds of the world's top 15 oil companies have been involved in a merger in the past year," Desmarest said. "Our groups could not ignore this situation. Through a friendly agreement, we are constituting a powerful group that will be a major actor in the oil industry."While the newly merged group's girth is huge in European terms, analysts and bankers point out that its daily output of 2.1 million barrels of crude is half that of the company resulting from the merger of Exxon Corp and Mobil Corp-its reserves are less than half those of the Exxon-Mobil combination and its refining capacities are a third of those of Exxon-Mobil's. Many bankers and analysts expect European consolidation to continue, and one banker close to TotalFina suggests that Italy's ENI SpA could be the next to join forces with TotalFina. "TotalFina can counterbalance the three Anglo-Saxon champions Exxon-Mobil, Royal Dutch Shell Group and BP Amoco PLC with a continental European champion," the banker says. "The most logical step would be an alliance with ENI."Last week, ENI denied it was in talks to create a three-way alliance with Elf and TotalFina. "We're not about to embark on another merger," Demarest said in an interview Monday. He said at a news conference Monday morning that he didn't yet know what the new group's name would be and couldn't provide details on the responsibilities of the members of the merged group's executive committee.Under the terms of the improved offer, TotalFina is offering 19 of its shares for 13 Elf shares, up from four TotalFina shares for three Elf ones under its original offer. The new offer sent Elf shares up 3.15 per cent to 186.50 euros in Paris trading Monday, while TotalFina shares fell 0.38 per cent to 129.50 euros. Under the accord, four executives from Elf and four from Total will join in an executive committee presided over by Desmarest. TotalFina also agreed to set up a "joint study group" to look into the best way to "pursue a policy of growth" in the chemical business, though the idea of a spinoff has been ruled out. TotalFina and Elf will withdraw all pending litigation, and Elf is withdrawing its own bid for TotalFina, under which it offered three of its own shares and 190 euros in cash for every five shares of TotalFina.Desmarest raised the estimated amount of synergies that the merger is likely to produce to 1.5 billion euros from 1.2 billion euros, and said he plans to cut about 4,000 jobs from the 130,000 work force of the combined group, largely through attrition. Net earnings per share probably will fall by more than 3 per cent in 2000, but should rise by about 2 per cent in 2001 and 6 per cent in 2002, Desmarest predicted.While many in France Monday hailed Jaffre's decision to cut short the battle, the outcome falls far short of his hopes of demerging the chemical businesses. Most analysts and bankers say Jaffre had little choice but to give in. He is widely credited with having turned Elf around since his 1993 appointment to the helm of what was then a state-controlled company. But critics believe Jaffre reacted too slowly to the wave of consolidation sweeping the industry. Already overtaken in size by TotalFina after its acquisition of Petrofina, Elf was placed on the defensive by TotalFina's surprise bid July 5, and Jaffre's so-called Pac-Man defence - based on a spinoff of the chemical business - failed to succeed.Desmarest made no secret Monday that he considers a chemical spinoff "a bad idea" and said it would not be on the agenda of the study group set up to look into the chemical operations.
