BP A Takeover Target? Don't Bet On It

Todd Shriber
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The dramatic slide in BP's stock price has had plenty of consequences, all of them negative, leading wary shareholders scrambling to fine any tidbit of good news to cling to. With good news related to BP harder and harder to come by, the prospect of a takeover of the embattled oil giant has the potential to be quite intoxicating in a forbidden fruit sort of way. Before the takeover news hit the mainstream financial press, the most compelling reasons to be involved with BP's stock were its double-digit dividend yield and the appearance of a stock trading at a discount.

Those are dubious reasons to buy a stock in the first place. After all, there are reasons why stocks acquire high yields and start to look cheap and those reasons are never good. Sure, the market will always have ''accidental'' high yielders and there will always be legitimate value plays available to investors, but BP (BP) did not properly fit under either scenario. The juicy yield was acquired on the back of bad news and at $50, $45 and $40 the stock was obviously a value trap.

Now comes the takeover talk. Savvy investors know that buying a company's stock simply because it MAY be acquired is a real roll of the dice. Going in, the best odds you have are 50-50. A 50% chance the company is acquired, a 50% chance it is not. In the case of BP, one analyst quoted in a Bloomberg story on the topic of a BP takeover put the odds of a buyer coming out to BP's rescue at 10% to 20%. At best, those are casino odds.

Most mergers and acquisitions fail to deliver value to shareholders after the deal is completed, but the oil industry is an exception. Exxon created value with its purchase of Mobil, Chevron did the same by buying Texaco and BP did the same by purchasing Amoco. Of course these deals highlight the fact that the oil industry is no stranger to behemoth purchases, but that does not mean the buyers for BP are plentiful. Far from it.

Chevron (CVX) would be stretched too thin to buy BP. The same could be said for Petrobras (PBR) and that company has plenty of assets to develop in Brazil. Exxon Mobil (XOM) could afford BP and Royal Dutch Shell makes sense from a strategic standpoint. BP and Shell reportedly discussed a marriage in 2004 and the companies' assets would fit well together, but even that is not likely to be enough to launch a Shell (RDS-A) courtship of BP.

Unfortunately for BP, the company has put a lot of emphasis on deepwater drilling. With the government's moratorium on deepwater drilling, oil companies are not going to scramble to acquire those kind of assets. Then there is the matter of contingent liabilities, also known as how much BP is facing in cleanup and legal costs related to the spill. No one knows what that tab is going to be. ING put the number at $22 billion. Credit Suisse puts it at $37 billion. That is a big discrepancy and certainly a factor that no buyer is going to overlook.

While the recent market environment has turned the energy sector into anything but a Garden of Eden, it might still be wise to consider BP the forbidden fruit of the industry. As for a takeover, don't bet on it.