An article yesterday incorrectly reported about Gulf Oil Corp.'s credit rating. It should have said that Standard & Poor's Corp. put Gulf on its "credit-watch" list after the company announced plans to merge with Cities Service Co.
A federal judge temporarily blocked the proposed $5.13 billion merger between Gulf Oil Corp. and Cities Service Co. on antitrust grounds yesterday, amid speculation on Wall Street that Gulf might be having second thoughts about the deal.
U.S. District Court Judge Charles R. Richey issued a temporary restraining order against the proposed merger, acting at the request of the Federal Trade Commission, which claimed that the combination of Gulf and Citgo would restrict competition in gasoline and jet fuel marketing and petroleum transportation on the East Coast and in the Southeast.
"If the acquisition is consummated, the public interest may very well be and will be irreparably injured, because the commission will be effectively prevented from obtaining adequate relief," Richey said at a hearing here.
A Gulf lawyer read into the hearing record a Citgo statement that it no longer wanted to be represented by Gulf's legal team because it would not be in the interest of Cities' shareholders. Citgo officials would not elaborate on the statement.
Gulf's board of directors is scheduled to meet today to consider the situation, an action considered highly unusual by many Wall Street observers, who said the FTC's objections could be overcome without action from Gulf's board. The board's executive committee met yesterday to discuss the merger, but Gulf would not say what transpired there.
"The fact that they've called a board meeting to discuss this means there's a snag somewhere," said Constantine Fliakos, who follows the oil industry for Merrill Lynch. "You don't just call a board meeting to discuss details. There must be something substantive for them to call a board meeting."
"If the odds were, say, 85 out of 100 that the merger was going to be consummated, looking back two or three weeks ago, I'd say now that the odds are somewhat less," said Sanford Margoshes, an oil analyst at Bache Halsey Stuart Shields. "I'd say the odds are now 60 out of 100."
The analysts speculated that Gulf's management may be uneasy about the finances of the proposed merger. Worries that the purchase price would strain Gulf's financial resources caused Gulf stock to decline and its credit-rating to be cut after the deal was announced in June.
In addition, analysts suggested, Gulf management may be concerned that the expected congressional repeal of a tax provision that can benefit merging companies will adversely affect the merger with Cities Service.
Should the Gulf-Citgo deal collapse, one analyst said, the biggest losers may be speculators in Cities Service stock. Wall Street professionals have bought huge chunks of Cities stock, expecting to get Gulf's $63-a-share price. If the deal fell through, the stock price would plummet, said Barry Sahgal of Bache.
"You're talking about a $2 billion market-value loss," he said. "It could result in a chain reaction. There are a number of small brokerages that are up to their eyeballs in Cities Service, and there could be some financial hardship there."
Still, many analysts believe that unless Gulf gets cold feet, it will be able to work out a settlement with the FTC and complete the deal. Gulf should be able to overcome the FTC's objections by selling the disputed properties, analysts said, while acknowledging the market for petroleum operations is subdued these days because of recession.
The analysts said that the disputed operations were not essential to Gulf in any case; the company has said all along it desires Cities Service for its crude oil and natural gas reserves.