December 5, 2023

Reuters BreakingViews: BP Fast Becoming a Takeover Target

Almost a year since the Gulf of Mexico spill hobbled BP on its western front, the company finds itself bogged down in Russia. An arbitration court has ruled that BP’s proposed drilling alliance with Rosneft breaches terms of an existing joint venture with TNK-BP. Any resolution will probably be costly.

The fight with TNK-BP is especially damaging because Robert Dudley, BP’s chief executive, once led the venture.

Worse, BP is considering swapping 5 percent of its equity for a stake in Rosneft even if TNK-BP succeeds in blocking the drilling alliance outright. The reasoning is hard to justify.

Add it up and BP looks exposed. Adjust for the gain in global stock markets since the gulf fiasco, and BP’s market value of $146 billion is $75 billion below where it was before the spill.

Even if BP were to be found grossly negligent, the post-tax bill would be just under $50 billion. The problems in Russia, which account for about 10 percent of BP’s profit, justify some additional discount.

Though Shell, known for being ultracautious, would be unlikely to make a hostile offer, Exxon must be tempted. The cost savings from its 1998 deal to buy Mobil were about 10 percent of combined operating expenses. On that basis, an Exxon-BP combination could yield annual savings of $12 billion.

The industry already has cut fat over the last decade, so a more realistic figure may be $10 billion. Taxed and capitalized, this would be worth about $70 billion. That’s enough to pay for a 30 percent premium for BP shareholders and still leave room to resolve the issues over the Russian deal and the gulf spill.

Any deal still looks complex. Antitrust watchdogs would probably require ExxonMobil and BP to sell American refining and marketing activities. The gulf and Russian liabilities remain big overhangs. And there are political challenges for any advance on Britain’s national oil champion.

A deal in the short term doesn’t look likely, but the longer BP’s shares languish, the more the financial logic will overcome other worries.

Not Quite OpenTable

The dot-com sector’s latest crop of I.P.O. hopefuls wants to emulate OpenTable. They are all conjuring up comparisons to the company, a restaurant booking Web site whose shares have risen fivefold since they started trading. While similarities exist, none of the comers can quite match OpenTable.

Don’t blame underwriters and venture capitalists for trying. OpenTable’s $2.6 billion current market value means it trades at an enviable 18 times the $146 million analysts expect the company to book in revenue this year. And the stock fetches 99 times consensus estimated earnings per share of $1.10.

No wonder a handful of companies harnessing the Internet to add a new twist to relatively old business models want to sit around OpenTable. Two already have filed I.P.O. plans: Pandora in the radio trade and Zipcar in the rental-car business. Zillow, the real estate information service, could start an offering soon, too.

All of them may deserve to trade at a premium to their Jurassic competitors by dint of enormous top-line growth rates. Pandora’s annual advertising sales more than doubled in the year through Jan. 31. Zipcar’s top line grew 42 percent in 2010.

But investors sizing them up against OpenTable ought to consider the distinguishing factors. First, both Zipcar and Pandora are clawing most of their revenue away from traditional rivals. That limits the revenue pools they are stealing from. It also means competitors will fight back.

That raises a fresh question about barriers to entry. Zipcar has created a handy network of locations for its car-sharing customers, but Hertz has begun to create one of its own. Pandora’s brand is valuable and the stations its clients create make the service sticky, but it has no exclusivity on the musical content it provides.

OpenTable is in a different class because of the network effect: every restaurant that uses the reservation software makes the service more valuable for the site’s users. And restaurants will be happy to pay fees to OpenTable as long as it generates additional demand.

It’s hard to blame any I.P.O. newbie for wanting to cast itself as the OpenTable of its industry. But with few exceptions, investors should know better.


Article source:

Speak Your Mind