Upping the Ante

The fight for Cities Service

Megabuck mergers have become almost commonplace on Wall Street in the last couple of years, but last week there was one so huge and unexpected that even the most jaded brokers blinked in surprise. In a startling new twist to an ongoing takeover battle between Mesa Petroleum Co. and Cities Service Co., the Gulf Oil Corp. entered the fray. Gulf, the ninth largest U.S. industrial corporation (1981 sales: $28 billion), announced that it had worked out a friendly takeover deal with Cities Service (1981 revenues: $8.5 billion). Gulf agreed to pay $5.04 billion for 100% of Cities Service's 80.4 million outstanding shares.

If concluded, the takeover would rank as the third largest in U.S. corporate history, surpassed only by last year's $7.5 billion merger of Conoco and E.I. Du Pont de Nemours, and the $6.2 billion acquisition of Marathon Oil by U.S. Steel. The resulting company would instantly become the seventh largest American industrial firm, with sales exceeding $36 billion.

Gulf's offer was part of its long-term corporate strategy. The Pittsburgh company has declining domestic energy reserves, and it has been eyeing other firms with large fuel supplies. Last January, Chairman James E. Lee told a group of security analysts: "I recognize that in the near term our best shot at reversing our reserves decline may be to buy reserves." Cities Service will provide plenty. The Tulsa-based firm has land believed to hold at least 307 million bbl. of crude and more than 3 trillion cu. ft. of gas.

Gulf's immediate concern last week, though, was tactical. The company wanted to head off aggressive Mesa Petroleum, a company that is little more than one-twentieth Cities Service's size, with 1981 revenues of only $407 million. Therefore, Gulf decided to come in with a $63 per share bid, which was nearly 70% over Cities Service's market price of about $37 per share. It was hoped that such an offer would immediately stop all competition.

For Mesa and its hard-charging chairman, T. Boone Pickens, the Gulf offer created confusion aplenty. Said he: "We are just scratching our heads and trying to see what options we have." Three weeks ago, Pickens offered a package of $3.8 billion in Mesa stock, promissory notes and other credits to acquire 100% of Cities Service. Meanwhile, however, Charles J. Waidelich, the company's chairman, had been trying to outflank Pickens with an offer to pay $17 per share for a 51% majority interest in Mesa. By last week, Cities Service had received tender offers of 41% of Mesa's stock. In an effort to scoop up the rest, Waidelich boosted his offer to $21 per share.

For a time last week, the Gulf proposal to acquire Cities Service put Mesa in a bind. The company stood to profit handsomely from the Gulf bid, at least initially, because Mesa already held slightly more than 5% of Cities Service's stock. That was acquired on the open market beginning in 1979 at an average price of $44.28 per share. But if Cities Service had decided to push ahead with its 51% offer for Mesa, Gulf would have acquired the controlling interest in Mesa. Pickens would thus have been left as an executive without a company. Late in the week, Pickens got out of his trouble by striking a deal with Cities Service. The Tulsa firm agreed to drop its takeover bid, while Mesa said it would sell its 5% holding in Cities Service back to the firm at $55 per share. The price, which still gives Mesa a substantial profit, is significantly below Gulf's offer. If antitrust lawyers in the Federal Trade Commission, which has jurisdiction in the case, do not now move to block the takeover, the deal should sail through unimpeded.

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