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The Federal Trade Commission is certain to closely scrutinize Chevron Corp.’s acquisition of Texaco Inc., and some antitrust experts predict that the agency will reject the transaction outright. “I’d be surprised if they’d approve it,” said one lawyer familiar with oil deals. “I don’t think that (FTC Chairman) Bob Pitofsky is willing to let another merger occur in this industry.” The deal encountered almost immediate criticism in Congress, even though most lawmakers were home campaigning. Sens. Mike DeWine, R-Ohio, and Herb Kohl, D-Wisc., the chairman and ranking member of the Senate Judiciary antitrust subcommittee, said they were “seriously concerned” by the merger and vowed that their subcommittee would take a “close look” at the transaction. They also instructed antitrust regulators to examine the impact of the deal on competition within the industry and in local markets. “During this time of high oil costs, it is vigorous competition, not consolidation, that will provide the lowest prices to consumers,” the senators said. One lawyer said the deal could even get entangled in the presidential election. Vice President Al Gore has been a vocal critic of “big oil” and he could bring this up in the presidential debate to put Texas Gov. George W. Bush on the spot. “I fully expect that you will hear this at the debate,” the lawyer said. “Gore can hang the oil industry around W’s neck.” The biggest antitrust problems are expected to be on the West Coast where the retail operations of the two oil giants overlap. Chevron operates 1,114 service stations in California, while Texaco has 724 in the state, according to company officials. Chevron Chairman Dave O’Reilly said in a conference call with reporters Monday that the companies are willing to divest operations to secure antitrust clearance, although he declined to specify what the firms are willing to sell. “We certainly are aware that there is a concentration issue downstream in the United States and we expect the FTC to do something about it,” O’Reilly said. But he said the benefits to consumers of this deal proceeding greatly outweigh the harm. The combined company will have more resources to devote to exploration and production, which will help ensure that there is enough fuel to meet customer demand in the United States, he said. “We are confident the regulators will see it this way and that we will put this merger together,” O’Reilly said. Several lawyers said Chevron and Texaco must make substantial concessions if they hope to win over the FTC. “This is definitely getting close to the line,” said Joseph Angland, a partner in the New York law firm of Dewey Ballantine LLP. Will Tom, a former senior antitrust official at the FTC who is now a partner in the Washington office of the Morgan, Lewis & Bockius law firm, said the existence of three prior mega-mergers in this industry will cause the FTC to look more closely at this deal. Yet he said regulators will not have a “closed mind” if Chevron and Texaco propose ways to ensure competition is not harmed. “They are going to get flak if they approve another oil merger, but they are used to getting shot at,” Tom said. One source familiar with the transaction said the companies will offer to sell a large chunk of their West Coast retail and refining outlets to resolve antitrust worries. They also will propose buyers for these assets to the FTC, the source said. The agency is increasingly requiring companies to identify buyers for divested assets before it will approve a consent decree. It was unclear Monday whether the FTC will require the companies to sell all of Texaco’s West Coast operations to a single buyer. The FTC required such a clean sweep of all of Atlantic Richfield Corp.’s Alaskan assets in the BP Amoco/Arco deal, and it required a clean sweep by state of East Coast gas stations in the Exxon Corp./Mobil Corp. merger. One New York antitrust lawyer said she expects the FTC to require a clean sweep of stations in individual cities or other markets where the two companies compete, rather than statewide. “I’d look for this to be market to market,” she said. “That is one reason why deals like this take so long.” Complicating the antitrust review is Texaco’s joint venture with Royal Dutch/Shell Group. The two companies agreed in 1998 to combine their retail operations in the Midwest and West Coast, although they did not change any brand names. The intent was to eliminate waste by combining refining and distribution in these areas. That deal would have to be undone as part of a Chevron/Texaco merger. One Washington lawyer said there are “substantial problems” with the deal because the firms compete throughout the United States. About the only way to resolve antitrust problems, the lawyer said, would be for the companies to sell Texaco’s retail operations to Royal Dutch/Shell. The lawyer said Chevron would likely get a below-market price for the assets because it was a forced sale. On the other hand, the deal would leave the company with all of Texaco’s overseas operations, including production and exploration facilities. The FTC has taken an increasingly aggressive stance on oil company mergers in the past year. In the November order approving the Exxon-Mobil deal, Pitofsky and two other commissioners wrote that future oil company mergers will be held to higher standards. “With the recent mergers in the industry, concentration has significantly increased,” they wrote. “Accordingly, the commission has been demanding in its requirements for restructuring this transaction and will review any future proposed mergers in this industry with special concern.” The lawyer predicting the deal’s demise said the companies may be betting that Bush wins in November and replaces Pitofsky with a Republican appointee who is less opposed to big mergers. “That is a long bet,” the lawyer said. Others questioned whether the presidential elections would matter. Two lawyers noted that the agencies pride themselves on political independence. Also, the companies are predicting the deal will close in six to 12 months. It would be very difficult for either candidate to confirm a replacement for Pitofsky within that time, they said. The European Commission also must approve the deal. A Chevron spokesman said obtaining that approval should not be difficult because only Texaco has major operations in Europe. “We don’t anticipate major regulatory delays with the European Union,” the spokesman said. Handling the antitrust side of the deal for Chevron is the New York law firm of Pillsbury Madison & Sutro, while Texaco has retained the Washington office of the Howrey Simon Arnold & White law firm. Copyright (c)2000 TDD, LLC. All rights reserved.

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