Oil giants Exxon Mobil and Chevron have discussed merging. In the fantasy M&A game, Exxon could in theory buy Chevron at a premium, mostly for stock. But Darren Woods may not be investors’ preferred leader for the combined group. Chevron buying Exxon might bring the right chief executive, with Mike Wirth in charge, but a deal that way around could call for too much leverage. There’s a third, way, too: a $400 billion merger of equals.
Exxon is the bigger of the two companies, with a market capitalization of over $210 billion, more than 20% larger than Chevron’s. If it were to offer a 20% premium for its rival, Woods’ Texas-based company could fund the purchase almost entirely with shares and still leave its own shareholders with just over 50% of the combined company, according to a new Breakingviews calculator. And because Chevron has much less debt – and almost as much EBITDA forecast for 2021, according to Refinitiv data – Exxon could close the deal looking less leveraged than it is now.
The trouble is that Chevron’s Wirth has proved a better operator, relatively speaking. Since taking the helm in February 2018, shares are off by just over 25% while Exxon’s stock is down by more than 40%. He has also earned the reputation of being a prudent dealmaker, having walked away from buying Anadarko Petroleum at what was a market high.
Picking the right boss is key to a successful merger. If either company offers a meaningful premium for the other, even cutting 5% of combined operating costs, more than $3 billion a year, wouldn’t compensate, once taxed and capitalized. The chief executive of the new fossil-fuel giant would have to do more with less capital expenditure, too.
But Chevron buying Exxon is a stretch. Wirth would have to issue more than $80 billion of debt so that current shareholders could maintain a majority stake. That would jack up the debt-to-EBITDA ratio at Chexxon to nearly 3 times, more than twice the current level.
A merger of equals is the dream answer, ignoring real-world hurdles like antitrust concerns. The market values of the two companies have been converging. Even now they are close enough, at around 55-45, to argue for an equal union. Then it’s a question of sharing out the chief executive and chairman roles, board seats, headquarter locations, and other sensitive goodies. The closer the two get in size, the better the deal looks.