Occidental Petroleum Corp. yesterday offered $3.8 billion for Cities Service Co., which put itself up for sale this week after its merger agreement with Gulf Oil Corp. collapsed.
Cities Service said its board will consider the offer Monday, but it added that it would continue to seek other suitors.
Occidental Chairman Armand Hammer notified Cities management yesterday that his company would offer $50 cash per share for 38.2 million Cities Service shares, about half of the company's outstanding shares.
Occidental then would offer securities worth around $50 a share for the remaining stock.
A merger of Occidental, the nation's 12th-largest oil company, and Cities, ranked 19th, would create a $23.6 billion company that would be the nation's eighth-largest oil concern and the 12th-largest here overall.
Analysts said that, in acquiring Cities, Occidental, which has diversified into meat-packing and chemicals, would obtain badly needed domestic oil and gas reserves. Los Angeles-based Occidental gets virtually all its oil from overseas.
"Oxy badly needs a more stable United States supply of crude oil," said Osman Erlap, an analyst at Bache Halsey Stuart Shields in New York. The acquisition of Cities Service "is excellently suited for Oxy's purposes," he said.
Cities has been seeking a merger partner since its $4.8 billion Gulf deal collapsed Aug. 6. Its officials threatened earlier this week to liquidate the company if a buyer were not found. Cities has filed a $3 billion breach-of-contract suit against Gulf because of the aborted merger.
Gulf said it backed out because it was unable to overcome Federal Trade Commission antitrust objections to the proposed merger, although FTC sources and Cities officials say the objections were minor. Analysts speculate that Gulf had second thoughts about the cost of its acquisition bid.
Antitrust problems are not expected with an Occidental-Cities combination. Hammer wrote in his letter: "We do not believe that the proposed transaction poses antitrust obstacles."
Occidental's offer is worth considerably less than Gulf's, but analysts said the collapse of the Gulf deal and Cities' mention of liquidation had reduced Cities' value.
In any case, Wall Street observers considered Gulf's offer to be a little high, considering Cities' assets.
Gulf's withdrawal stranded professional speculators who had bought Cities stock at $50 to $55 a share in expectation of getting the $63-a-share Gulf offered.
Cities stock skidded to less than $30 a share after Gulf pulled out, and closed yesterday at $33.25, up $1.75. But analysts said yesterday that the Occidental offer could allow investors to recoup most of their losses.
"Fifty dollars a share is certainly an acceptable bargain for Oxy and a good enough bailout for the shareholders of Cities," Bache's Erlap said.
But Erlap warned that Occidental's offer for Cities could strain its finances. Occidental is still absorbing the impact on its debt of a $746 million takeover of Iowa Beef Processors Inc. a year ago.
"The only big question mark is how Oxy is going to pay the $3.8 billion," he said. "One has to ask, where do they get the money?"
He said the financing for the merger would increase the company's debt and its already large pool of preferred stock.
Occidental, led by the colorful, globe-trotting Hammer, has a checkered history of corporate acquisition attempts.
The takeover of Iowa Beef surprised Wall Street, while another diversification attempt, a 1978 offer for the paper-making Mead Corp., failed after a bitter fight.
And Occidental's acquisition of Hooker Chemical in 1968 eventually subjected the company to bad publicity surrounding Hooker's Love Canal toxic waste dump in upstate New York.