international business; Exploring Corporate Strategy CLASSIC CASE STUDIES The Sale of Burmah Castrol to BP Amoco Gerry Johnson

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Exploring Corporate Strategy
CLASSIC CASE STUDIES
The Sale of Burmah Castrol
to BP Amoco
Gerry Johnson
In 1999, the management team of Burmah Castrol, the lubricants and chemicals business, led by its
CEO Tim Stevenson, decided to recommend to the corporate board the sale of the company to BP
Amoco. In what follows, Stevenson explains how the company arrived at the point of considering this
option, and why the board decided to take it.
l l l
The Burmah Oil Company was founded in 1886 by Scottish entrepreneurs interested in exploiting newly
found oil deposits in Burma. Success there was followed by a milestone investment in an exploration
concession across a substantial area of Iran acquired from the Shah. That company, then called the
Anglo-Persian Oil Company, later became British Petroleum (BP). Burmah held a major shareholding
in BP right through until the early 1970s. Indeed, after a long period operating effectively as an intermediate holding company for BP shares, the management of Burmah in the 1960s used the value of
the shares as collateral to embark on an ambitious plan to turn Burmah into both a fully integrated oil
company and a substantial conglomerate group. Businesses bought included Castrol and Signal Oil
and Gas; other interests included major exploration licences in the North Sea, a substantial fleet of oil
tankers and a raft of other activities, including high-street retailer Halfords, various chemicals companies and Quinton Hazell, an automotive component supplier. This period of expansion was brought
to an abrupt halt by the recession consequent on the Yom Kippur war in 1974. Much of the company’s
subsequent history is the story of how this expansionist drive was gradually unwound, and a new corporate approach and concept developed.
THE STRATEGIC DEVELOPMENT OF BURMAH CASTROL
Tim Stevenson explained how the portfolio of the Burmah Castrol businesses developed and changed
from the 1960s:
First there was a process of divestment: selling Signal Oil and Gas, selling the tanker fleet,
re-negotiating the Bahamas terminal and selling other peripheral companies like the automotive
parts retailer, Halfords and Quinton Hazell.
This case was prepared by Professor Gerry Johnson, University of Strathclyde Graduate School of Business, based on
discussions with Tim Stevenson, the past CEO of Burmah Castrol, and on published sources. The author is published with
the permission of BP Amoco. It is intended as a basis for class discussion and not as an illustration of either good or bad
management practice. Not to be reproduced or quoted without permission.
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The Sale of Burmah Castrol to BP Amoco
Over time, and as the process of slimming down progressed, there emerged the concept a twopronged Burmah Castrol, consisting of related businesses. One prong was the Castrol business
which, throughout all this turmoil, was continuing to develop as a very successful global
business with an increasingly powerful brand. The other prong was Chemicals, which it was
planned could provide a substantial counter weight for Castrol. From the later 1970s/early 1980s
onwards, a portfolio of speciality chemicals businesses was put together, taking some of the
businesses inherited from the past as the foundation and adding to them by buying in highquality speciality businesses as additions to the portfolio. The emerging rationale for Burmah
Castrol that resulted was that the Group’s business was the sale and marketing of speciality
oil and chemical products. The argument was that we were good at managing Castrol and
that we would be able to demonstrate to shareholders and the market that we could also very
successfully manage chemical businesses whose style and approach to the market would be
in certain key respects similar to that followed by Castrol. We also argued that management
had skill in spotting both good managers and sound investment opportunities: the combination
would enable all the Group’s businesses to prosper and grow. There was sufficient similarity in
terms of key factors for success between Castrol and the Chemicals businesses to enable senior
management to add value across the portfolio. The idea that Burmah Castrol, as slimmed down,
was a conglomerate per se was resisted.
Whilst the process of simultaneous slimming down and building up the chemical portfolio
proceeded, the market’s response, as measured by improvement in the share price, was
satisfactory. Castrol continued to perform strongly.
There was, however, internal questioning, particularly towards the end of the 80s, about
where the Group was headed over the medium to long run. There was an argument that Burmah
as a two-legged stool needed a third to give it, overall, an appropriate, stable shape. This led to a
search for moves that might provide such balance. Included within this search were possibilities
for rendering the Chemicals portfolio as a whole more substantial and therefore more able to sit
comfortably alongside Castrol. This process culminated in the successful hostile acquisition of
Foseco in the early 90s. The opportunity arose because Foseco had lost its way; its share price
was very depressed. In fact, as it turned out, the price wasn’t quite as cheap as it might later
have become, because economic conditions continued to deteriorate after the purchase. This
inevitably affected Foseco’s short-run performance to a greater extent than Burmah Castrol had
anticipated. In turn, this meant that it took somewhat longer to achieve an appropriate return on
the investment than originally planned. However, vigorous restructuring work on the business
and an improved economic environment in due course demonstrated the acquisition to have
been sound. But in a qualitative sense the acquisition of Foseco was important because it led to
some serious questioning in the market for the first time concerning Burmah Castrol’s overall
raison d’être. Was it appropriate for Burmah to be expanding its Chemicals businesses to such
a substantial extent? How usefully related was the Castrol business to the Chemicals businesses,
and what was the real value in having them in the same portfolio?
There were also other issues to sort out in the Chemicals businesses where some were
underperforming: work needed to be done to improve their overall operating efficiency. That
was a task that was successfully set about and delivered: significantly improved ratios were
achieved through cost cutting and effective focus. But that was not enough. The market response
was, ‘You’ve improved the performance but what are you going to do now?’ When I took over
as chief executive in 1997 a clear message from some substantial investing institutions was that
management should not contemplate further substantial expansion – through acquisition – of the
Chemicals portfolio. ‘We don’t understand why you bought Foseco. We don’t understand how
you think you can add value to acquisitions of that sort.’
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RECONSIDERING STRATEGY AND STRUCTURE
By the mid-1990s Burmah Castrol consisted of Castrol, blending and marketing lubricants; and
Chemicals with a residual Fuels retailing business – effectively the final relic of the past – which was
in the process of being sold off. Until 1997 Castrol and Chemicals were run as two distinct groups
of businesses. From 1997 onwards, for reasons explained below, the corporation was restructured into
discrete business units. Exhibit 1 summarises the activities and performance of these business units.
In 1994 Mike Dearden, then CEO of the Chemicals businesses, had undertaken a review of the strategy and structure of those businesses. He had inherited a situation in which the acquired businesses still
provided the foundation for the structure of his group. Foseco operated as Foseco; Fosroc as Fosroc,
Sericol as Sericol and so on; each with its head office and often with subsidiary geographical offices.
There had been no attempt within this to sort out a rationale for the Chemicals Group. The strategic
review identified an underlying theme of industrial marketing and quality service as the core competences of the successful chemicals businesses. It was clear that the success of these businesses was
much more to do with understanding customer needs than the production of chemicals. This conclusion
resulted in a move to much greater focus on devolution of responsibility to the market-facing business
units.
In 1996 Tim Stevenson, then CEO of the Castrol business, also instigated a strategic review of that
side of the portfolio. The passenger car engine oil business, which represented 75 per cent of total
profits, faced the prospect of more efficient engines requiring longer and longer gaps between oil
changes; and therefore of potential long-term volume decline. However, the strategic review was
triggered by a short-term challenge: Tim Stevenson explained:
In 1996, we had a difficult year in North America after a run of consistently good volume and
profit growth; and simultaneously we started to develop worries about long-run developments
in the passenger car engine oil business in Europe. Thus we believed we had the makings of a
problem in the developed world concerning the sustainability of the sorts of growth achieved in
the past in selling growing volumes of high-margin sophisticated lubricants into passenger car
engine oil markets. And whilst we had a very successful developing world position, particularly
in Asia Pacific, that was unlikely to offer sufficient to offset the difficulties we might be going
to encounter over a five-year run – absent of action – in the bigger developed markets in Europe
and North America.
All this provoked us into having a re-look at what was happening to our passenger engine oil
business, what the medium-term market development might look like and what was going to
happen to the competitor structure. The conclusion was that our old approach, unaltered, was
not going to enable us to continue to grow the business at the rate previous strategic plans had
assumed. We also looked at the other businesses; the industrial lubricants business, the marine
lubricants business and the commercial lubricants business. The key overall conclusion that
emerged was that our internal structure for managing the global Castrol lubricants business was
no longer appropriate if we were to optimise our position in each of the four markets. Our old
structure had been a geographically based model, with four regional directors, the line managers
responsible for over 50 country managers who ran their country businesses, very successfully
hitherto, like individual fiefdoms. Within the country they were responsible for all aspects of
Castrol’s business, covering all the four market areas, and for sourcing of raw materials,
blending, distribution, customer relationships; everything. They had to comply with central
instructions in terms of the use of the brand and other broad policy areas but, subject to a
relatively small number of rules of engagement, they were left to themselves.
A problem was that some of the areas of business were suffering because of the dominant
culture of the passenger car engine oil business. So, for example, an opportunity for significant
business development was being missed because there was no co-ordinated policy for focusing
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Exhibit 1 The Burmah Castrol business in the late 1990s
Castrol Consumer
Castrol Industrial
Castrol Marine
Castrol Consumer is world leader
in the supply of car and motorcycle
lubricants and services, marketing
to workshops and retail chains,
auto accessory stores and petrol
stations. Principal products are
engine oils, e.g. GTX, transmission
fluids and brake fluids.
Castrol Industrial is the world
leader in supplying metalworking
fluid and services to industries
such as transport and metal
component manufacturers. The
business also supplies process
industries such as food and
beverage, mining, power
generation and offshore oil
and gas production.
Castrol Marine markets specialist
lubricants and fluids to the
international marine market.
Customers range from the largest
international shipowning groups,
leisure and cruise operators to
small fishing boat owners. Castrol
Marine provides unique lubricant
solutions and essential business
information, increasingly through
the Internet.
Market share 11%
Market position 1
World market size 11bn litres
Main competitors:
Mobil
Shell
Texaco
Market share 6% (metalworking)
Market position 1 (metalworking)
World market size 12bn litres
Main competitors:
Fuchs
Houghton
Milacron
Market share 12%
Market position 5
World market size 2bn litres
Main competitors:
BP
Mobil
Shell
Castrol Commercial
Foseco Foundry
Fosroc Construction
Castrol Commercial provides
products and services principally
to on and off-road vehicle fleets.
Off-road business includes vehicles
used in construction, quarrying,
agriculture and forestry. On-road
fleets cover trucks, buses and
coaches. Castrol Commercial
assists its customers in optimising
service intervals, achieving fuel
economy and improving engine
efficiencies.
Foseco Foundry is the world’s
leading supplier of consumable
chemicals and services to the
foundry industry. Foseco’s products
are used in the conversion of
molten metal into finished castings.
This enables foundries to produce
castings of high quality, strength
and weight whilst improving
efficiency and reducing energy
consumption.
Fosroc Construction provides
formulated products for the civil
engineering and construction
industries worldwide. Products
include concrete admixtures to
provide enhanced characteristics
and greater cost effectiveness;
a wide range of cement-based
mortars and products and systems
to extend the life of concrete
structures.
Market share 19%
Market position 1
World market size £1.2bn
Main competitors:
Ashland
Borden
Huttenes-Albertus
Market share 2%
Market position 5
World market size £6bn
Main competitors:
SKW-MBT
Sika
W R Grace
Sericol Printing
Chem-Trend Releasants
Foseco Steel
Sericol Printing is the world leader
in screen printing inks and ancillary
products. It supplies inks to the
graphic, textile and speciality
markets which include CDs, credit
cards and snowboards. Sericol
provides its customers with a high
level of support, including training,
computerised colour matching
and environmental services.
Chem-Trend Releasants is the
world’s largest manufacturer of
specialised mould and die cast
release agents. Customers range
from manufacturers of tyres and
car steering wheels to shoe soles
for the footwear industry. Each
relies on Chem-Trend’s tailor-made
formulations and application skills
to improve quality, cost and
productivity.
Foseco Steel’s strong market
position has been built on an ability
to provide major steel producers
with a total package of products
and services which are vital to the
safe, efficient and cost-effective
production of high-quality steel.
Market share 2%
Market position 5
World market size 11bn litres
Main competitors:
Exxon
Mobil
Shell
Market share 11%
Market position 1
World market size £1.1bn
Main competitors:
Coates Screen
Nazdar
Market share 182%
Market position 15
World market size £270m
Main competitors:
Acheson
Acmos
Wacker
Market share 5%
Market position 2
World market size £1bn
Main competitors:
Thor-Didier
Stollberg
Vesuvius
Source: Burmah Castrol annual report.
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The Sale of Burmah Castrol to BP Amoco
on the industrial lubricants business. The conclusion was reached that to optimise performance
over the whole business, and to achieve economies of scale, we needed to move away from a
geographic structure to one focusing on each of the four areas of Castrol as global businesses in
their own right. We made the decision halfway through 1997 and then implemented it in 1997
and 1998. It was a very significant cultural change for the organisation. The old structure had
been immensely successful. It had enabled a very strong ethic of customer focus and a strong
esprit de corps. If you had the right man in Australia or Vietnam or Brazil, and you gave him
his head, he produced strong results. So turning our backs on all of that and sweeping away
the country structure was a major move. We originally planned to implement over two years,
phasing it in; but in practice the job was completed in just over 12 months. It was done quickly
and with minimal disruption. The results didn’t suffer and on balance little of our market-facing
customer focus was lost. Furthermore, the early signs were that the substantial benefits that we
hoped to achieve from the change would materialise.
The logic behind these changes had two main elements. First, it gave the opportunity of
unleashing potential in the industrial business and the commercial business and giving marine
the proper focus that it needed. But the biggest benefit, second, was that the restructuring
enabled a global focus on the passenger car engine oil business. Market trends couldn’t be
reversed, of course; but by having a single team to think about how we were going to manage
the business globally, to take advantage of economies of scale on a regional and global basis
and maximise the potential of our global branding strategy, opportunities were opened up for
managing that business much more effectively in what looked as though it would become a
tougher environment.
Exhibit 2 summarises the financial performance of Burmah Castrol in the late 1990s.
THE GOLDEN THREAD
In 1997 Tim Stevenson took over as CEO of the Burmah Castrol Group. He was aware that some financial institutions were looking for action at the Group level. They had witnessed and approved the
restructuring of the organisation; but there remained bigger questions.
I was seen by some as an opportunity to force management to look at the business with new
eyes; if you like, through their eyes in terms of how value could be released to them. Our Board
had earlier discussed, in general philosophical terms, what management’s objectives ought to be
and whether shareholder value should be the driving force of what we were doing. There was
complete agreement that that had to be the guiding force. Our share price reached £10 in the
early 1990s and hadn’t really moved from that level. It moved to £13 at one point and down to
£7 at another, but these were the extremes of a dull range. [See Exhibit 3.] When you have a
share price that is doggedly stuck, but you have high-quality assets, there is an imperative to do
something about it because, if you don’t, sooner or later the market will find a way of doing it
for you – of delivering value to the shareholders.
At this time we argued with our shareholders that the rationale for Burmah Castrol lay in our
having a ‘golden thread’. Although Castrol and Chemicals were separate entities and we didn’t
manage them as one, there were sufficient similarities in terms of the sorts of businesses they
were and the way they went to market, to enable Burmah Castrol to add value at the top level.
The ‘golden thread’ argument had received qualified support from a study of 21 of the most successful
businesses in Burmah Castrol, spanning consumer, industrial and commercial lubricants and various
chemicals businesses from different parts of the world. It concluded that the success of most of the businesses was based on competences to do with high levels of service rooted in localised knowledge
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The Sale of Burmah Castrol to BP Amoco
Exhibit 2 Five-year summary of Burmah Castrol financial performance
Turnover net of duties:
Continuing operations (including acquisitions)
Discontinued operations (note (i))
Operating profit before exceptional items:
Continuing operations (including acquisitions)
Castrol subsidiaries
Share of operating profit in associates
Castrol
Chemicals
Fuels
Energy investments
Central management
Discontinued operations
Interest
Profit before exceptional items and taxation
Exceptional items:
Continuing operations
Discontinued operations
Profit before taxation
Taxation
Profit after taxation
Minority interests
Profit for the financial year attributable to shareholders
Balance sheet
Fixed assets
Net current assets
Total assets less current liabilities
Long-term creditors and provisions
Minority interests
Shareholders’ funds
Statistics per ordinary share:
Ordinary dividends (note (ii))
Earnings per ordinary share before exceptional items
Earnings per ordinary share after exceptional items
Shareholders’ funds
1999
£M
1998
£M
1997
£M
1996
£M
1995
£M
2,907.8
35.9
2,943.7
2,761.9
75.2
2,837.1
2,778.6
157.4
2,936.0
2,853.5
206.0
3,059.5
2,751.3
297.2
3,048.5
211.4
1.6
213.0
78.6
1.9
4.0
(13.6)
283.9
0.7
284.6
(25.0)
259.6
185.8
1.6
187.4
71.7
1.7
4.0
(13.3)
251.5
7.3
258.8
(9.5)
249.3
209.6
1.6
211.2
72.8
(0.8)
5.9
(13.6)
275.5
18.4
293.9
(14.2)
279.7
201.4
3.0
204.4
64.1
(0.7)
5.1
(12.5)
260.4
21.9
282.3
(20.9)
261.4
194.7
4.5
199.2
60.3
3.4
0.7
(12.6)
251.0
29.7
280.7
(27.7)
253.0
(76.7)
(7.3)
175.6
(79.9)
95.7
(22.7)
73.0
(49.0)
34.7
235.0
(86.8)
148.2
(19.6)
128.6
(24.1)
(17.9)
237.7
(92.2)
145.5
(22.2)
123.3
(7.5)
18.5
272.4
(97.6)
174.8
(19.7)
155.1
253.0
(97.8)
155.2
(20.2)
135.0
883.1
309.4
1,192.5
(603.1)
(68.7)
520.7
pence
864.6
381.8
1,246.4
(395.6)
(62.6)
788.2
pence
839.1
376.9
1,216.0
(391.9)
(61.1)
763.0
pence
914.0
424.7
1,338.7
(491.6)
(80.5)
766.6
pence
974.5
445.7
1,420.2
(631.4)
(80.7)
708.1
pence
47.3
77.0
39.0
291.5
43.0
66.1
60.7
369.4
40.5
75.5
58.0
329.6
36.8
71.1
74.2
332.6
33.45
66.9
66.9
320.8
(i) Discontinued operations relate to the results of subsidiary and associated undertakings discontinued at any time during the five year period
under review.
(ii) Excluding any Foreign Income Dividend enhancement.
of how their product applications could meet customer need. Similar to the earlier exercise on the
Chemicals businesses, the conclusion was that success was not so much based on the technical aspect
of product as on industrial marketing and service on a local basis. An important exception to this pattern was that part of the passenger car lubricants business which involved sale of product through retail
channels. This relied a great deal more on brand and marketing push. The results of the exercise did,
however, support the decision to reorganise the Group into market-facing business units. Further, it
helped identify appropriate, and inappropriate, roles for the centre. The Group centre of Burmah Castrol
should concentrate on developing people with the skills to work internationally but with local sensitivity; but it should avoid heavy-handed central co-ordination. The Corporate Centre was reorganised as a
result of this exercise, splitting the ‘corporate’-level activity off from the ‘servicing’ activity which was
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Exhibit 3 Relative performance of FTSE All-Share vs. Burmah Castrol, from
January 1995 to July 2000
set up to be market responsive. So if operating companies did not want to buy the services the centre
was offering they could go elsewhere.
There were, then, arguments that management could use in support of the proposition that Burmah
Castrol businesses were linked by a ‘golden thread’:
We believed we had a strong story to explain to the institutions what it was we were trying to
do, and how we were going to release value.
However, as we got into the streaming of Castrol into four separate business streams, this
increasingly had an influence on our own thinking about the shape of the portfolio as a whole.
Having split out the industrial business from the passenger car engine oil business, it further
highlighted, for example, that there might be more similarities between the industrial lubricants
business and the foundry chemicals business than there were between, say, the industrial
lubricant business and the passenger car engine oil business. So by breaking up Castrol into
business units, we had an effect on our own internal thinking.
At the same time as this change within the company, a process of major consolidation in
the oil industry was under way. We believed this to be a once-off process. It seemed to us that
Castrol – its brand and marketing culture – would represent a great prize to a number of the
major oil companies because of economies of scale and the broader coverage of the lubricants
market that it would provide. This led us to believe that there could be latent potential for
releasing substantial value to our shareholders by in some way putting our lubricants business
together with another major lubricants business.
Thus at this point there were various distinct strands of thinking. At one level we were
explaining to the City that management had a clear vision for developing our Castrol and
Chemicals portfolio as restructured. At another, we believed we had to explore what routes
might be open to us to release the value that we believed was inherent in our businesses but
which was not reflected in our share price.
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THE PRESSURE FOR RELEASING SHAREHOLDER VALUE
The pressure on management to demonstrate how Burmah Castrol could release more value for
shareholders remained; and there was growing concern internally about a need for greater clarity of
corporate strategy:
The activism from some shareholders continued. When our share price went down to £7.50 there
was particularly strong pressure from some shareholders along the lines of ‘We don’t want to
strong-arm you but you must do something about this. You are sitting on a strong global asset in
Castrol, the value of which is being dragged down by the fact that as management you continue
to manage speciality chemicals businesses which are not so highly rated’. And by 1999,
internally there was some feedback about the lack of vision in the corporation. We had a series
of senior executive briefings in Europe, Asia Pacific and in North America; open and frank
debate suggested that senior teams sought a clear banner for the future of the corporation
that they could rally round. With half of the profit coming from the passenger car engine oil
business, however, it was difficult to provide a really strong argument that would provide an
overall cohesive umbrella that people could buy into. It was not possible for senior management
to argue that there was something over and above the golden thread – which some were
questioning. So at this point we had a combination of some lack of belief internally, lack of
belief externally and a possibly time-limited opportunity as a result of oil industry consolidation.
In addition, one of our non-executives argued consistently at board meetings that there was
indeed a time-limited opportunity to release value to shareholders. ‘If you leave it you will
discover that it’s passed you by and the opportunity for releasing value will disappear, and,
worse, in some scenarios you will find, as an independent player who has not played a part
in consolidation, you are increasingly squeezed by the big players.’ As an executive team we
came to a view that we had to explore what opportunities there were for us to play a part in
the process of consolidation.
Joint venture discussions
The earliest conversations we had with a major player in the oil industry were in late ’97 and
the summer of ’98. The argument was that at a time of consolidation you need to be aware
how the big players may operate in the lubricants market. They have substantial economies of
scale. If they should choose to use the advantages of those economies of scale to buy market
share through cutting margins in the developed markets, that could seriously affect our business.
They can make such cuts and still make good returns because they enjoy economies of scale that
we don’t have. If we could establish a joint venture, we would have the possibility of releasing
value by locking our brand alongside another major brand, and reaping the benefits of scale.
At the same time it could head off the perceived threat to our business from the process of oil
industry consolidation.
We went into these discussions on the basis that what we had to offer was the premier
independent premium lubricants brand in the consumer market and a strongly embedded
marketing culture. Our working assumption was that we could achieve value and long-term
growth security, by allying ourselves in some way with a major oil company.
Discussion about possible structures, however, raised issues about how Burmah Castrol
could structure a joint venture for its Castrol business with another major international oil
company in a way that would unequivocally put value into our shareholders’ hands. In a joint
venture with a major oil company where they would own 50 per cent of Castrol and our
shareholders would own 50 per cent of Castrol, what would that then make of Burmah
Castrol as a whole? An independent investor in Burmah Castrol would have a 100 per cent
investment in a £800m turnover series of speciality chemicals businesses and a 50 per cent
share in a major global lubricants business, the other half of which would be owned by a
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major oil company. Our advisers counselled that this would not be acceptable to the market.
Any bid premium in our share price would go, and we would be tied in terms of flexibility
for what we could do with Castrol. This led to the inevitable conclusion that release of
value to shareholders through allying Castrol with another lubricants business effectively
meant selling.
Other strategic options
What was the alternative to such a sale, bearing in mind the value which it could potentially
release? The alternative which management developed, in considerable detail, involved breaking
the Group up. This acknowledged market scepticism about the coherence of the portfolio.
Although the need for radical restructuring was accepted, an issue which management did not
fully resolve at this point in the process concerned how the slicing should be carried out. There
were two views.
One option would be to sell Chemicals, significantly run down the Burmah Castrol head
office to those functions needed to support the Castrol business, and be even more radical than
we were being in terms of the way the Castrol business was run by taking out substantial cost.
This would have involved major rationalisation of the whole supply chain; of the back office
infrastructure throughout the world; of the way the portfolio of brands was run. In other words,
turning the business into one focused on sales and marketing organisation with most other
activity being outsourced.
The alternative was a variant on the theme. It was to sell parts of the Chemicals businesses
but to keep those that were automotive based. Under this model we might have retained our
foundry chemicals business, the Chem-Trend releasants business, the investment casting
business and sold construction chemicals, mining, printing inks, cables, wax – all of the things
that didn’t obviously fit into an ‘automotive products and services’ model. That would have left
us with a business of two parts: a passenger car engine oil business and an industrial-facing
business – and with the residual possibility of in due course breaking it into two. Some work
was done on the viability of this option.
THE DECISION TO SELL
On 11 August 1998, BP announced its merger with Amoco and in so doing initiated a wave of consolidation amongst the major oils. This was followed on 1 December 1998 by Exxon’s announcement
of a merger with Mobil, which put into play the lubricants business within the BP-Mobil joint venture
in Europe.
During its early conversations with Amoco, BP had come to the realisation that there remained a
strategic gap in its downstream portfolio. The small lubricants business that it would potentially inherit
from Amoco in combination with BP’s existing lubricants business simply would not have the critical
mass to compete effectively on the world stage. After the Amoco merger, BP either had to consider
maintaining a niche tactical presence or perhaps even a total withdrawal from the lubricants business,
or seek other opportunities to grow the business into a material globally branded business. The thinking within BP had identified Burmah Castrol amongst others as possible opportunities to help achieve
this objective.
As this thinking crystallised in mid-1999, the decision was taken within BP to take a significant
strategic step in the lubricants sector first by extracting at a minimum its share of the lubricants business from the Mobil joint venture in Europe, and secondly by pursuing exploratory discussions with
Burmah Castrol. BP management saw Burmah Castrol as a vehicle for growth, delivering a global
brand, world-class marketing talent and significant synergy savings as well as, importantly, growth
through brand extension, cross-selling, and access to additional emerging markets. It saw no advantage
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The Sale of Burmah Castrol to BP Amoco
in retaining the ancillary Chemicals portfolio within Burmah and resolved, if an arrangement were
reached to acquire Burmah, to divest them as soon as practically possible.
In Burmah Castrol too the implications of the likely consolidation in the industry were being
considered. Tim Stevenson explained:
It was clear that a knock-on effect would be a major change in the status of the European-wide
pre-existing joint venture between BP and Mobil. It seemed to us, as part of our approach to
examining options for combining our lubricants business with that of one of the majors, that this
opened an opportunity. We approached BP with this proposition, and they responded favourably.
A team was put together to examine the possibilities.
Within Burmah Castrol there was, quite rightly, considerable executive debate about the
appropriateness of selling the business. The argument that something had to be done to release
value to our shareholders locked up in our business but not reflected in our share price was
clearly powerful. Yet there were also considerations of corporate tradition: the fact that Burmah
had existed for over 100 years; the fact that we were beginning to develop an aggressive
alternative to outright sale to a third party.
All acknowledged that there was a point at which we would have to sell. It came down to
a discussion concerning the net present value of what management’s alternative ‘go it alone’
option would deliver against the price BP would be prepared to pay. In the event BP’s offer
of £16.75 per share had to be set against that value that management’s ‘plan B’ could deliver
over time.
At the board meeting that decided to recommend the BP bid the board accepted that the
company was at a crossroads; something significant had to happen. If the BP bid were not to
be recommended then there would need to be a radical change to the shape of the corporation,
involving the abandonment of the ‘golden thread’ argument The alternative option on the table
at the meeting involved the plan outlined earlier: radical reshaping of the portfolio, together with
substantial cost-saving measures and some aggressive new business initiatives. We had modelled
this in terms of its impact on the share price over the medium term, assuming successful
implementation. The board’s debate concerned management’s ability to carry through a radical
new agenda; how quickly success would be reflected in the share price; and how this would
stack up against BP’s £16.75 offer.
The response from the financial institutions and the press to the board’s decision to accept
£16.75 was that it was the right thing to do. Internally, response was inevitably mixed. The
initial response in Castrol was broadly enthusiastic. ‘It’s the right thing to do; taking a five-year
view as an independent company we’re going to come under increasing pressure. Putting the
Castrol business together with the BP business gives us a much greater footprint globally
around the world, particularly in Europe but also in the Far East. BP are tougher, harder
managers than Burmah Castrol; very rigorous in terms of costs. Castrol needs that. They’ll
bring their rigour to sorting out the expense base’. In the Chemicals businesses there was
inevitably some sense of betrayal; certainly disappointment and anxiety about who the new
owners were going to be. But the Chemicals executives continued to manage the businesses
very professionally. Results for the first six months of 2000 were excellent. Perhaps hardest
hit were those people in Burmah Castrol head office: the ending of the PLC meant the end of
requirement for many head office functions. They were perhaps the people who most felt we
should have stayed independent and go our own way; although of course the reality was that
had we not sold to BP, our own restructuring plan would likely have put many jobs in jeopardy
in any event.
In July 2000 Burmah Castrol formally became part of BP Amoco. Most of the corporate board of
Burmah Castrol left, including Tim Stevenson, and BP started the process of finding buyers for the
Chemicals businesses.
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