Officials of Cities Service Co., charging Gulf Oil Corp. with a breach of contract "of a dimension unprecedented in the annals of American business," threatened yesterday to liquidate their company if they could not find an alternative merger partner to Gulf, which unexpectedly dropped a $5.13 billion bid for Cities last week.
Either liquidation or another merger would allow stockholders to make more on their Cities stock than the current depressed market price provides, although analysts said the $63-a-share figure offered by Gulf was probably out of reach.
Cities, the nation's 16th-largest oil company, also filed a suit yesterday in state court in Tulsa, Okla., where it is based, charging Gulf with fraud and breach of contract and asking for $3 billion in damages.
Gulf's reasons for aborting the merger last Friday remained a source of controversy. Despite Gulf's claim that it terminated the offer because it was unable to negotiate a settlement with the Federal Trade Commission over antitrust objections to the merger, Cities said the objections could have been easily overcome. Analysts suggested that Gulf may have concluded upon closer examination of Cities' assets that it had offered too much for Cities Service.
Cities, seeking to protect its shareholders' interests, said yesterday it would purchase 20 million of its 77.9 million shares, which could push up the stock's price. The company also said it would seek to replace the Gulf deal by finding another offer at a similar price and, failing that, it said it might sell the company's assets piecemeal.
"In essence, their balance sheet has worsened and I would imagine that management is under pressure to do something for their stockholders at this point," said Al Silber, an analyst at Dean Witter Reynolds.
"There's no way out for them without liquidating or selling out to someone," said one analyst. "The company's a goner."
Analysts said Cities' plan to buy its own shares would be a stopgap measure that would help support the stock's price but increase the company's debt.
"If they're out buying stock, they're increasing their debt even more, at a time when debt is expensive," another analyst said.
Similarly, the specter of another offer or liquidation will keep the stock price from sagging too much, experts said. "So long as you've got the visibility of a liquidation or a merger, I think it will be a prop to the stock," said Barry Sahgal, an analyst of Bache Halsey Stuart Shields.
Wall Street sources were hard-pressed, however, to name a potential merger partner for Cities.
Ironically, Cities entered into the merger agreement with Gulf in June to avoid a tender offer from tiny Mesa Petroleum Co., which had been dogging the company for two years. After striking the deal with Gulf, Cities bought Mesa's 5 percent stake in Cities for $55 a share, and signed an agreement with Mesa that prohibited Mesa from buying any more shares of Cities for five years.
Analysts speculated that Cities could get a $45 to $50 a share offer for its stock from an alternate merger partner, and liquidation would fetch an additional $10 a share.
But they cautioned that liquidation would likely be a drawn-out process of seeking buyers for each of Cities' components. The company's best-regarded assets are its oil and gas reserves, although it also has refining, transportation and marketing operations that could be offered for sale.