Dealing for an oil giant

ROBERT MILLER August 12 1985

Dealing for an oil giant

ROBERT MILLER August 12 1985

Dealing for an oil giant



The Gulf Canada Ltd. jet took off shortly after 2 a.m. last Friday with a very important passenger—Toronto real estate tycoon Paul Reichmann. His destination: Switzerland, via New York. The purpose of his trip: a much-needed vacation. Barely an hour earlier, after 4½ months of determined pursuit and one sensational failure, Reichmann had closed a $2.85-billion deal that effectively made his family the new owners of the country’s fourth-largest oil company. That deal returned Gulf’s vast energy reserves—on the Prairies, in the Beaufort Sea and off Newfoundland—to Canadian hands. It also involved a shotgun wedding between Gulf Canada and the Reichmann-controlled Abitibi-Price Inc., the world’s largest newsprint manufacturer. And it foreshadowed a major sale of Gulf assets intended to help the Reichmanns pay for their spectacular entry into a potentially lucrative field.

The Reichmanns’ energy aspirations appeared to founder in mid-July. Then, the collapse of their initial attempt to buy San Francisco-based Chevron Corp.’s 60.2-per-cent stake in Gulf Canada, which employs roughly 9,000 Canadians, ran into obstacles. Efforts to prenegotiate the sale of some of Gulf assets to publicly owned Petro-Canada failed, and the Reichmanns decided to walk away from a $25-million deposit. That failure suprised the Canadian business community and caused concern among executives at Gulf’s debt-ridden U.S. parent. But the close-mouthed Reichmanns, who achieved multibillionaire status through the real-estate operations of privately owned Olympia & York Developments Ltd., refused to quit. And after two weeks of secret negotiations with other Canadian corporations, as well as with Chevron, Olympia & York finally signed a deal so complex that it may take years to unfold all of its details.

Under Friday morning’s agreement, the Reichmanns paid Chevron roughly $2.3 billion for 49.9 per cent of Gulf—a total of 113,500,000 shares at $20.35 per share. At the same time, the Reichmanns bought an option, at $3.50 per share, to purchase the 10.3-per-cent balance of Chevron’s Gulf holdings—a further 23,520,500 shares—for an additional $19.50 before Dec. 2. Most analysts predicted that the Reichmanns would exercise their option. The Chevron agreement was the linchpin in an intricate master plan devised by Paul Reich-

mann, Olympia & York’s senior executive vice-president. At the same time as Olympia & York was buying Gulf from Chevron, it was selling Abitibi to Gulf. Said Gulf Canada president Keith McWalter, a career oilman: “We are very impressed with the management of Abitibi.

We have no intention of interfering with them.

But it does strengthen us to have them on our side.”

Another part of the Reichmann master plan was an agreement with Norcen Energy Resources Ltd., controlled by Toronto financier Conrad Black. Norcen will pay a reorganized Gulf $300 million by Aug.

30 and become a minor partner with about a sixper-cent stake of the company’s resource holdings. And Norcen has the option of subsequently leaving the partnership, taking with it part of Gulf’s energy stake off Newfoundland, five producing oil and gas fields in Alberta and Superior Propane Ltd., a Gulf subsidiary. Norcen first entered the ReichmannGulf negotiations just before the original deal collapsed.

In their formal announcement on Friday, the Reichmanns said that they are also actively pursuing the sale of Gulf’s refineries and filling stations—the company’s least profitable divisions—to companies that they declined to name. One buyer seemed certain to be Petro-Canada. Indeed, Regional Industrial Expansion Minister Sinclair Stevens confirmed that the national oil company was “very close to an understanding” with the Reichmanns to buy Gulf filling stations in Western Canada, where Petro Canada has a weak market presence. There was widespread speculation within the financial community that Prime Minister Brian Mulroney had pulled the government out of the original agreement at the eleventh hour—despite the fact that Energy Minister Pat Carney strongly supported the acquisition of Gulf by Canadian interests. But Stevens denied the speculation, saying that it “was a misunderstanding.” For her part, Carney said that she was pleased by the deal, ultimately announced last Friday.

With a Petro-Canada deal all but assured, the £ Reichmanns were seek-

ing buyers for Gulfs Eastern Canada filling stations. Oil industry analysts named British-owned Ultramar Canada Inc. of Toronto as a strong contender. Ultramar, a relatively small firm, does most of its business in Quebec. But analysts said Ultramar needs more retail outlets to make efficient use of its 105,000-barrel-a-day Quebec City refinery, now operating at roughly 75 per cent of capacity. Ultramar chairman Lawrence Woodruff has held talks with the Reichmanns but, according to company spokesman William Barry of Toronto, the companies have not struck a deal.

The Reichmann-Chevron agreement was followed by a rapid exchange of paper. While the Toronto Dominion Bank was clearing Olympia & York’s $2.3-billion cheque to Chevron for 49.9 per cent of Gulf’s shares, Abitibi was depositing a $672-million cheque from Gulf for a 49.9-per-cent block of its stock. As well, Gulf had agreed to pay an additional $460 million for a further 34.1 per cent of Abitibi.

It also agreed to offer the same price — a record $21 a share—to all minority Abitibi shareholders. And the Reichmanns pledged to offer minority shareholders in Gulf either a combination of cash and debentures worth $20.80—45 cents more than they paid Chevron—or shares in a new company, to be called Gulf Canada Enterprises Ltd. Altogether, Gulf pledged to spend $1.25 billion acquiring 90 per cent of Abitibi, which employs nearly 15,000 Canadians and which was 93 per cent owned by Olympia & York. The Reichmanns will use the bulk of the Abitibi proceeds to help pay Chevron, which will then reduce its $16-billion debt.

The second Reichmann offer to Chevron was roughly $150 million less than the first. But because of a rise in the value of the Canadian dollar, Chevron will realize virtually the same amount in U.S. funds. For the Reichmanns it was one benefit of an otherwise frustrating series of delays. Still, the final accord went together with astonishing speed. A week before it closed, Paul Reichmann and Black were still discussing Norcen’s participation. When that was agreed, Reichmann began a series of telephone negotiations with Chevron in San Francisco. Last Thursday afternoon three senior Chevron executives—vice-chairman-elect Kenneth Derr, vice-president Thornton Savage and senior financial officer Thomas Russell—arrived in Toronto aboard a corporate jet. Less than 12 hours later Paul Reichmann was on his way to Europe and the multibilliondollar exchange of cheques and stock certificates had begun.