DOME'S LAST DEAL
Federal Energy Minister Marcel Masse was winding up a low-key government visit to Bogotá, Colombia, when he cut short his trip to come back to his Ottawa office last week. He returned to attend an emergency meeting Thursday morning with two fellow cabinet ministers and a team of top-level bureaucrats. The problem was the proposed $5.1-billion sale of Calgary-based Dome Petroleum Ltd. to American-owned Amoco Canada Petroleum Co. Ltd. While the government fell silent, opposition critics were clamoring for a Canadian buyer, such as Toronto-based TransCanada PipeLines Ltd. (TCPL), which had also submitted a bid. But after a day of consultations, Masse declared that the Tories wanted a private-sector sale rather than a bailout of debt-plagued Dome.
“Given the nature of Dome’s problems,” said Masse, “any buyer should be considered.” Conditions: The House of Commons was recessed for the Easter break, but the opposition parties catapulted the Dome deal to the top of their agendas. New Democratic Party Leader Edward Broadbent, worried about the increased foreign ownership of Canada’s vital oil and gas sector, said that he would demand an emergency debate when the House resumed sitting this week. Liberal Leader John Turner met with Dome chairman and chief executive officer J. Howard Macdonald for two hours in Calgary on Wednesday. Turner said afterward that he would still prefer a Canadian solution but could live with the Amoco purchase provided certain conditions were met. Later, Macdonald held his first news conference on the sale and declared
flatly that Amoco’s offer was the best for all participants, including Canadian taxpayers and Dome’s impatient creditors.
Rejected: But by week’s end Dome’s eventual fate was still far from settled. The company’s 60 domestic and international creditors, who are owed about $6.3 billion, will have to approve the sale. Dome and Amoco went to work on a compensation arrangement which will be presented to the creditors in early May. As well, Dome shareholders must give their blessing to any sale. Finally, Investment Canada will scrutinize any foreign acquisition. To complicate matters further, once-rejected
TCPL is preparing a new bid, and a third potential suitor, Imperial Oil Ltd., was not out of the action.
Dome’s Macdonald put the odds of the Amoco deal going through at little better than “50:50,” and wary Amoco negotiators even had an expensive penalty agreement built into the package. If the agreement falls through, for what a Dome official would only describe as “any number of reasons,” then Dome would have to sell to Amoco its rich, but still largely undeveloped,
Primrose heavy-oil field in Alberta for a drastically undervalued $80 million.
Macdonald is widely credited with holding Dome together in his 31/2 years at the helm. But not everyone agreed with his management approach. One top Calgary oil executive said that he operated Dome like an accountant, which he is, rather than an oilman. If the company had been sold three years ago, he complained, it would have fetched much more.
Bonus: Macdonald himself is the big winner in any sale of Dome. The 58year-old Scot joined the troubled company in October, 1983, after a 23-year career with the London-based Royal Dutch/Shell Group. For his negotiations with Dome he hired Manhattan investment firm Morgan Stanley and Co., which negotiated a salary of close to $1 million annually. In May, 1985, he had his employment contract amended to give him a $2-million bonus if he could arrange a merger or sale. He also has a lucrative retirement plan and a multimillion-dollar stock option.
In any case, last week’s revelations appeared to bring Dome Petroleum to the last chapter of its turbulent saga. Founded in 1950, Dome was a dazzling and daring company during the 1970s, which mesmerized politicians, bankers and investors. Chairman John P. (Smilin’ Jack) Gallagher had a reputation as a visionary who pioneered the high-risk, high-tech exploration of the frigid Beaufort Sea. Dome president William Richards was a buccaneer capitalist who masterminded a series of stunning takeovers. By the time Richards’s buying spree ended, Dome was the largest oil company in Canada in terms of assets. But it was also perched on the brink of
bankruptcy with an insupportable debt load. Gallagher and Richards resigned within months of each other in 1983, at the insistence of Dome’s bankers, and were replaced by Macdonald.
Collapse: Macdonald’s mission has been to save Dome from bankruptcy,
primarily by negotiating debt restructuring agreements with the creditors. In August, 1984, the company and its lenders signed a 12year agreement that reduced the principal owing through 1988 to $1.3 billion from $4.8 billion. But by May, 1986, following the collapse of world oil prices, Dome suspended principal and interest payments to some creditors, including the West German Bayer-
ische Landesbank. Dome’s calamitous downfall involved more than just debt. Its recoverable oil reserves fell as it sold off assets to pay its debts, capital spending plummeted to $186 million in 1985 from $1.5 billion in 1981 and its shares crashed from a high of $106 in 1978 to an ignominious low of 81 cents last year.
For the most part, the company’s miseries can be traced to one decision: Dome’s 1981 takeover of Calgary-based Hudson’s Bay Oil & Gas Co. Ltd. (HBOG). Richards and his top aides had devised a clever piece of corporate strategy to capture their prey. At the time, Delaware-based Conoco Inc., the 10th-largest U.S. oil company, controlled 53 per cent of HBOG. Dome first acquired 20 per cent of Conoco’s stock, then offered the shares to the U.S. giant in exchange for its HBOG holding. The ambush stunned and angered Conoco, but the U.S. company complied. The victory cost Dome $2 billion, and the remaining 47 per cent of HBOG cost another $2.2 billion in 1982, all of it borrowed money that would soon help to sink Dome.
Natural: Despite a ruinous debt load, Dome remained a key player in the Canadian oil industry. Dome still participates in one out of every six wells drilled in Alberta. Dome also owns one of the
largest spreads of oil and gas lands in the industry, and much of that acreage is unexplored. That situation is all the more attractive, said Toronto energy consultant Robert Robinson, because 39 per cent of Dome’s land is held under freehold title, a provision that allows the company to pay very low royalties.
According to several oil-patch observers, Amoco and TCPL were the two natural candidates to take over Dome as its debt troubles worsened. Calgary North MP Paul Gagnon, a former oilman, said that Amoco knows Dome’s assets better than most rival oil companies because of numerous joint ventures. “But Amoco would not be my first choice,” said Gagnon, echoing a common sentiment within the energy and investment communities. The concern is that Amoco Canada’s U.S. parent, Chicago-based Amoco Corp., has retained 100-per-cent ownership of its Calgary-based subsidiary. Most of the
other U.S. oil companies have sold a portion of their subsidiaries to the Canadian public through share offerings. As well, only one Canadian has ever been appointed president of Amoco Canada.
But Dome and TCPL are also linked through joint ventures and ownership (page 42). Between August, 1978, and May, 1979, Dome acquired a 48-per-cent interest in TCPL but was forced to sell four years later to raise cash. As well, TCPL’s current president, Gerald Maier, a Saskatchewan native, was president of HBOG at the time of the Dome takeover. He left the firm just months later over management differences. Maier initially revealed TCPL’s takeover intentions to Macdonald in January, 1986. But just as negotiations began, world oil prices plummeted catastrophically and both companies abandoned the discussions.
Debt: By last September oil prices had stabilized in the $23-per-barrel range and TCPL returned to the bargaining table. Its position had improved dramatically. Dome’s revenues were almost cut in half, and the firm was well on the way to reporting a crushing $2.2-billion loss in 1986. To make matters worse, a debt-restructuring plan designed to pay back its then$6.1-billion debt was rumored to be unacceptable to Dome’s creditors in Canada and abroad. A buyer had to be found —and quickly. TCPL, backed by the robust treasury of its giant parent, Bell Canada Enterprises, appeared to have the inside track.
TCPL’s interest in Dome was sparked in part by Ottawa’s continuing policy of deregulating the oil and natural gas industries. Under the new regime, TCPL would have to open its pipelines to all western natural gas producers, not just those contracted to TCPL. That cutthroat competition would erode TCPL’s virtual monopoly on the market in Central Canada by allowing all producers direct access to Ontario. But some analysts said that by acquiring Dome’s vast natural gas reserves, the pipeline operator would be able to influence natural gas prices with its vast supplies.
Rumors: While negotiating with a special team of Dome executives, Maier also went to Ottawa looking for a tax ruling that would make TCPL’s bid more
attractive to Dome’s creditors. According to Toronto energy analyst Denis Mote, TCPL wanted to purchase only Dome’s assets, for $4.3 billion, leaving a shell company behind that could owe some $600 million in taxes. TCPL would give creditors $1 billion from Dome’s future earnings and wanted the federal government to forgive the taxes. But TCPL vice-president Neil Nichols said
that the ruling never came. The $5.1billion Amoco deal, however, was an all-inclusive offer that did not involve the need for a tax ruling.
Then, by February, 1986, unsettling rumors began to leak into TCPL’s Toronto office. Two heavyweight multinationals, Royal Dutch/Shell and British Petroleum, were toying with the idea of buying Dome. “The rumors were very strong from Europe,” said First Marathon Securities oil analyst Richard Hallisey. He added that industry analysts were then surprised when word of yet another Dome takeover bid suddenly surfaced in the United States last fall.
At first the whispers involved Exxon Corp. of Manhattan, the largest oil firm
in the world and 70-per-cent owner of Imperial Oil Ltd. of Toronto. Dome refused to confirm the Exxon interest. However, Imperial chairman and chief officer Arden Haynes boasted in printed copies of a speech handed out in Calgary last week that his firm was in such solid financial health that it had bid for Dome. But Imperial, said Hallisey, apparently did not go through
with a bid because it feared the political debate that would rage following the purchase of Dome by a foreign company.
Clearly, TCPL management was aware of the growing interest in Dome, but the bombshell hit two weeks ago. In a late-afternoon telephone call to Maier at his Toronto office on Thursday, April 16, Macdonald bluntly told him that Dome had accepted Amoco Corp.’s bid. The deal that would have assured TCPL’s crude oil and natural gas supplies well into the next century was off.
Pressure: Amoco’s motives were much like TCPL’s (page 40). It, too, wanted to assure its future supplies of crude oil and natural gas. It took its cue from a speech by Masse last November, when he said that Ottawa would not prevent the sale of troubled Canadian oil companies to foreign concerns. Amoco Canada quickly launched a secret study that finally recommended the purchase of Dome. Amoco Canada president T. Don Stacy said that I pressure to make the move È came from throughout his x company. “The traffic comQ missioner in our building, and even our librarian, they all suggested it too,” he said.
But Stacy was concerned that the mighty Exxon would snatch the prize. He flew to Amoco’s Chicago head office and quickly received permission to go after Dome. Immediately after his return to Calgary, he asked Dome for data on 19 of its oilfields, and the boxes containing the information were quietly exchanged in a Calgary parking lot. In the weeks leading up to Amoco’s offer, 38 people, including economists, engineers and drilling experts, studied the data with the knowledge that rival Exxon was doing the same. But finally their multibillion-dollar offer was made, and accepted.
Faced with Amoco’s apparently successful offer, Maier went public with TCPL’s bid in the hope that politics
could do what TCPL’S treasury could not—secure the Dome purchase.
TCPL’s offer, he said,
“was a Canadian solution” that would place the troubled oil company firmly under domestic control. But Maier’s socalled Canadian solution required the much-discussed tax ruling that Ottawa did not seem to be able to produce. Said one analyst: “Macdonald just got tired of waiting for TCPL, so he took the Amoco offer.”
Roadblocks: In fact,
Macdonald sounded almost angry with Maier after Dome announced its decision to sell to a U.S. firm. He said that he gave TCPL two chances to improve its bid during the Amoco negotiations. But he said that it was only after he called to tell Maier that he had tentatively accepted Amoco’s bid that TCPL finally moved. But, said the Dome boss, “the variance did not take away from the objections we had. So there was no point to go on because the major roadblocks were still there.”
Still, Masse did offer TCPL one reason to be optimistic. The deal, he said, must still be approved by Investment Canada, the government’s foreign investment watchdog. And some analysts said that the agency’s review could stop, or at least dramatically alter, Amoco’s purchase by attaching tough conditions to the deal. For one, they suggested, Investment Canada could order Amoco Corp. to offer the Canadian public shares in Amoco Canada.
But Dome’s increasingly impatient creditors could also stop the Amoco takeover. Macdonald said that the firm has yet to decide how much its lenders will receive, but last week rumors circulated that major creditors—including the largest Canadian banks, which are owed some $3 billion—will receive 35 cents for every dollar owed.
Bankrupt: It was also not clear what an Amoco purchase would mean to Dome’s shareholders. Macdonald warned that they will have to be appeased if the deal is to go through: “The banks recognize that the shareholders have to approve the deal,” he said. “If you offer the shareholders nothing, why should they approve it?” But Amoco Canada’s Stacy was less accommodating, saying that shareholders should not expect much in the coming
negotiations. Said Stacy: “I hope Dome’s shareholders are sophisticated enough to know this is essentially a bankrupt company.” And energy consultant Robinson said that ultimately shareholders could get nothing for their stock because Dome’s unsecured
creditors could simply choose to put the company into bankruptcy.
Indeed, creditors may want more than the shareholders are willing to part with. The smaller, unsecured Swiss creditors, observed one Conservative MP, “are sufficient unto themselves to queer the whole deal.” He added: “People are crazy to think that the government can just approve or disapprove of this deal.” But for his part, Etienne Cammaert, the Canadian representative for Bayerische Landesbank, told Maclean's that “all creditors are expecting reimbursement.” He said that his bank, which is owed $9.6 million, has had talks with Dome but that nothing has been promised.
the tentative sale, Dome executives are still in a position to get more cash for such creditors as Bayerische Landesbank. Dome public affairs manager David Annesley said that, although the firm can no longer solicit new bids, there was nothing to prevent other firms from making Dome further offers. Indeed, some analysts said that Macdonald has simply established a worst-case offer for Dome’s creditors, leaving the door open for TCPL to make a more lucrative counterbid.
Whatever the outcome, the debate over Dome’s demise is bound to continue. Economic nationalists will not forgive the government for giving its approval to a U.S. multinational’s bid to acquire Dome’s assets (page 38). But Calgary oilman James Gray summed up many analysts’ view of of the Amoco move, which would save thousands of jobs, both directly and indirectly. “This is a very good thing for the industry,” he said. “It lifts a big cloud away.” But despite all the arguments, energy consultant Robinson said that Dome’s downfall contains a painful lesson in economics for Canadians. The company paid top-of-the-market prices when it acquired HBOG from a giant American corporation during an economic boom in 1982. Now a U.S. firm is poised to reclaim the HBOG assets, plus Dome itself, at the bottom of a market cycle and at fire-sale prices.