Cities Service, Mesa lock horns in giant-vs.-midget takeover test

By , Business correspondent of The Christian Science Monitor

For the past two weeks, Wall Street has had its own version of a soap opera: the Cities Service-Mesa Petroleum takeover fight.

This billion-dollar battle pits a much smaller but more aggressive company, Mesa Petroleum, based in Amarillo, Texas, against Cities Service Corporation, the nation's 18th-largest oil company, based in Tulsa, Okla. For the past two years Mesa has been eyeing Cities Service for a takeover. The result has been that each company is now trying to swallow up the other.

This financial soap also matches T. Boone Pickens Jr., Mesa's colorful chairman, against an imaginative group of investment bankers. The bankers are led by First Boston Corporation and Lehman Brothers Kuhn Loeb Inc., which are running the Cities Service defense.

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The result has been a spectacle that Wall Street analysts say has entertained them as well as enriched them. Nearly every day Mesa and Cities Service have been among the most active stock issues. One securities analyst, wishing to remain anonymous, compares the fight to a high-stakes poker game: Neither company is averse to bluffing, and it could be that the ante will be raised again.

The odds of something further happening, in fact, were increased on Friday, June 11, when Cities Service announced it had obtained only 45 percent of Mesa's stock. According to Rosario Ilacqua, an analyst with L. F. Rothschild, Unterberg , Towbin, the fact that Cities Service failed to get the 37 million shares (51 percent) of Mesa stock it was tendering for may hurt Cities Service defense efforts.

Mr. Ilacqua expects Mesa to get up to 80 percent of Cities Service stock by its cutoff date, June 16. He comments: ''This will be a textbook case of how a well-run small company can use outside investors to gain control of a larger company that is not well regarded. The business schools will be analyzing this for years.''

So far this is what the individual offers look like:

On June 7, Mesa Petroleum offered $45 a share for 15 percent of Cities Service stock. Once it lines up the financing it would like to buy up to 45 percent with cash.If Cities Service were to agree to a ''friendly,'' that is, uncontested takeover, Mesa says, it would pay $50 a share for 45 percent of the stock and offer some form of security for the remaining 55 percent. By this Wednesday, June 16, Mesa will know whether or not it received 15 percent of Cities stock.

Before Mesa's announcement, and in an attempt to sidetrack the offer, Cities Service two weeks ago announced a bid of $17 a share for 51 percent of Mesa's stock, or $21 a share if Mesa doesn't contest the bid. Mesa shareholders have until June 22 to tender their shares.

Nearly every day both companies have issued press releases denigrating each other's offers. Both companies say they will contest the other's offers and securities analysts admit the final result is hard to predict.

One securities analyst, also wishing to remain anonymous, said, ''If you want to write a socially responsible story, you should mention that even the investment professionals are confused by these offers, with their split proration dates and different turns.''

Barry Sahgal, an oil analyst with Bache Halsey Stuart Shields Inc., calling the takeover battle ''a strange situtation,'' hypothesizes there could be as many as six different outcomes.

For example, he says, Mesa might succeed in getting 15 percent of Cities Service stock, which would raise the share price, which was $34 a share early Friday. Or Cities Service might be succeed in buying Mesa, which would leave Mesa's price virtually unchanged (it was $18 a share early Friday). Or both may agree not to buy each other, which would lower the price of both stocks.

Other options, Mr. Sahgal says, include Cities' buying Mesa's current 5 percent interest, which was purchased at $44 a share, or even making a tender offer for its own shares, making it more expensive for Mesa to acquire. And, of course, either company could find another, larger partner and make another offer. Mr. Sahgal comments, ''When it comes to assigning probabilities to each of these events, I sign off.''

Paul Mlotok, an analyst at Salomon Brothers, says he likewise doesn't know which way the battle will go next. ''This could turn out different than we think ,'' he says. ''Halfway through the Marathon Oil battle, who would have thought US Steel would step in?''

Another analyst, William Craig at E. F. Hutton, thinks Mesa is too small to take over Cities Service. Mesa last year had sales of $407 million, while Cities Service sales were $8.6 billion. Mesa, however, showed a profit of $115 million, while Cities had a loss of $49.2 million.

Mesa is attracted to Cities Service because of the Tulsa company's unexplored acreage and large natural gas reserves. Securities analysts, though, have considered Cities Service to be a company in the process of liquidation, since it is not replacing its gas or oil reserves as fast it produces from them.

The main problem for Mesa is finding the financing for its takeover attempt. Mesa's chairman claims that Cities has scared off potential lenders. So far, Mesa indicates it has raised $600 million from about 10 banks. To complete its offer, it must raise about $1 billion more.

Should Cities Service ultimately succeed, analysts expect its earnings would be considerably diluted. One analyst estimates it would probably take a bid of $ 23 to $24 a share to attract Mesa's shareholders. At that price, he says, there would be substantial thinning of Cities Service earnings.

If Mesa wins, analysts say, it would be difficult to figure the effect on its earnings, since the company might break up parts of Cities Service and spin them off. ''With Boone Pickens,'' says one analyst, ''anything can happen.''

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