Texas Business

Friday, Oct. 9, 1998

Phillips, Diamond Shamrock agree to merge

Diamond 66 to be based in San Antonio, create new jobs

By GLASTON FORD
Staff Writer

   San Antonio-based Ultramar Diamond Shamrock Corp. and Bartlesville, Okla.-based Phillips Petroleum Co. have signed a letter of intent creating the largest independent refining, marketing and transportation company in North America.
   Under the deal, announced Thursday, all operating assets of Ultramar Diamond Shamrock and the North American refining, marketing and transportation operations of Phillips will be combined in a joint venture called Diamond 66, company officials said.
   The new company will be headquartered in San Antonio, which should gain new jobs. Significant operations will remain in Bartlesville including credit card, pipeline, lubricants, aviation and other support functions.
   Diamond 66 will have more than 12,000 branded gasoline outlets and 10 refineries, including the 300-employee Ultramar Diamond Shamrock refinery in Three Rivers. No layoffs are planned for the Three Rivers facility.
   The companies expect to eliminate about 1,000 positions by combining operations. They anticipate pre-tax savings of $250 million a year by the second year and annual capital savings of at least $50 million a year, officials said.
   The joint venture will help the companies stay competitive in an industry characterized by continuing consolidations, low growth in product demand, and increased competition from non-traditional gasoline outlets such as grocery stores and discount chains, said Roger Hemminghaus, chairman and chief executive officer of Ultramar Diamond Shamrock.
   "All of our stakeholders will benefit from the joint venture," Hemminghaus said. Customers will have increased convenience from more locations, he said. Commercial customers will have more products and services, and branded retail gasoline outlets will benefit from a larger base of credit card users, he said. And stockholders will see substantial savings, he said.
   The deal should benefit both companies, said Larry Tedeschi, an energy analyst with Banc One Investment Advisors Corp.
   "I think it is quite a favorable deal," he said. "It looks like the opportunity to cut costs is quite significant by combining the two companies."
   Ultramar Diamond Shamrock will own 55 percent of the combined assets and Phillips 45 percent, said Jean Gaulin, president of Ultramar Diamond Shamrock, who will become chief executive of Diamond 66 when the transaction is complete.
   Phillips will retain or receive a one-time cash equivalent payment of $500 million from the joint venture company when the transaction is complete and an additional $300 million in cash a year from the closing.
   The transaction is expected to close in the first quarter of 1999 pending the negotiation of a definitive agreement, approvals by boards of directors and approval of Ultramar Diamond Shamrock shareholders, officials said.
   Diamond 66, a limited-liability corporation, will have more than 2,500 company-operated convenience stores, 13,200 miles of pipeline and 64 product terminals. The combined company will have $20 billion in revenues and 29,000 employees, officials said.
   Diamond 66 will be managed by a nine-member board of directors, five chosen by UDS and four by Phillips.
   Although either company's credit card will ultimately be good at either retail outlet, most stores will continue to operate under their current brand, officials said.
   "We do not plan a major rebranding effort," Hemminghaus said.
   Diamond 66 has no agreements to buy crude oil from Phillips' exploration and production divisions, but will purchase the most economical crude that matches the refineries' needs, he said.
   Ultramar Diamond Shamrock will continue to trade on the New York Stock Exchange under the ticker symbol "UDS." Phillips Petroleum, which trades on the New York Stock Exchange under the ticker symbol "P,"is an integrated petroleum company with 17,200 employees worldwide.
   
Staff writer Glaston Ford can be reached at 886-3678 or by e-mail at fordg@scripps.com.

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