The Federal Trade Commission voted unanimously yesterday to challenge Gulf Oil Corp.'s $5.13 billion bid for Cities Service Co., saying it had reason to believe that the merger would violate antitrust laws by reducing oil industry competition.
Although FTC lawyers continued to negotiate a settlement with Gulf attorneys that would overcome the antitrust objections, the commission directed its staff to seek a preliminary injunction to stop what would be the third largest merger in U.S. history.
The request for an injunction, which is expected to be filed in U.S. District Court today will charge that the merger will increase concentration in gasoline marketing, in the production and distribution of kerosene jet fuel and in the transportation of petroleum products by pipeline.
The merger between Gulf, the 6th largest oil company in the United States, and Cities Service, the 19th largest, would make the new company the fifth largest oil firm in the United States.
The commission is taking action "to prevent harm to the American consumers that could come as a result of increased prices of petroleum products," said Thomas J. Campbell, head of the FTC's bureau of competition.
According to Campbell, preliminary estimates show that the merger could raise gasoline prices by at least one cent a gallon nationwide, resulting in $1 billion a year increase to consumers.
Gulf had no specific comment on FTC's action.
In the meantime, however, negotiations continue between FTC and Gulf attorneys over ways the merger could be accomplished to meet the FTC's objections.
However, Campbell said, "it would be a misstatement to say we are anywhere near a settlement in this case. I don't believe we are close."
Analysts predict that any settlement would presumably require Gulf to spin off some marketing and refining operations in geographical areas where the merger would sharply increase the company's market concentration.
The commission was specifically concerned about three key business areas that would be affected by the merger:
The concentration in the distribution of gasoline to service stations, especially in the East and Southeast where the two companies are direct competitors. Gulf, now the seventh largest gasoline marketer in the United States, and Cities Service, 16th largest, would become the fourth largest marketer under the merger. What's more, the commission said, there are 10 to 15 areas in the country in which the merger would result in highly concentrated markets, with Gulf having more than a 30 percent share.
The production and distribution of kerosene jet fuel in the East and Southeast. Commission sources say this was the most troublesome aspect of the merger because it would eliminate Cities Service, which has been an aggressive price competitor in the sale of jet fuel. As a result, the commission said price increases are likely, threatening substantial harm to the already ailing airline industry, which spends more on jet fuel than on any other item in its budget.
The shipment of petroleum products from the Gulf Coast to points all along the East Coast. The merger would give Gulf substantial control over the Colonial Pipeline, which ships half all all petroleum products in the East. Gulf would own such a large share in the pipeline that it would have veto power over any expansion of the pipeline, thereby enabling Gulf to curb supplies and raise prices.
These activities represent "a very large part of the merger," said Campbell.
The proposed merger, which would place Gulf as the seventh largest of all U.S. industrial corporations, would be the third largest in the United States, exceeded only by E.I. du Pont De Nemours & Co. Inc.'s $7.5 billion purchase of Conoco Inc. and United States Steel Corp.'s $6.5 billion takeover of Marathon Oil Co., both of which occurred last year.