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Suncor to Buy Petro-Canada

CALGARY, Alberta -- Canada’s third largest oil company by volume, Suncor Energy Inc., agreed to acquire Petro-Canada, a major energy company and c-store operator, for approximately $15 billion in stock, The Wall Street Journal reported.

Upon completion of the deal, the combined entity will operate under the Suncor name, while its refined products will leverage the strong brand presence and customer loyalty of the Petro-Canada name, Suncor said in a statement.

In addition, Suncor's 427 retail fuel locations will be added to Petro-Canada's 1,323, for a total network of 1,750 locations. Suncor also operates a refining and marketing business in Ontario, with retail distribution under the Sunoco brand. Its U.S. downstream assets include pipeline and refining operations in Colorado and Wyoming, along with retail sales in the Denver area under the Phillips 66 brand, according to the company’s Web site.

"We need to face head-on the issue of global competition in a time of economic uncertainty. In these difficult times, we believe that joining forces provides the strength we need to be a leader in an extremely competitive industry," Ron Brenneman, president and chief executive officer of Petro-Canada, who will assume the role of executive vice chairman in the merged company, said in a news conference yesterday. "Our combined business has the financial strength and operational capability to drive prudent, but substantial growth. We have the cash flow from our existing businesses, the access to additional funding and the people to turn a suite of exciting growth options into reality.

"When we looked in detail at the opportunity presented by this merger, we were very excited to see how well our assets fit together," he said.

The $15 billion price tag represents a roughly 30 percent premium for Petro-Canada, and under terms of the deal, Petro-Canada shareholders would get 1.28 shares of the newly combined company for each Petro-Canada share held, according to the report. The companies anticipate that the proposed merger will be completed in the third quarter of 2009.

If completed, the all-stock deal allows the companies to merge while conserving cash. The companies estimated achieving annual operating expenditure reductions of $300 million, from efficiencies in overlapping operations, streamlining business practices and improved logistics, according to a released statement.

The companies also expect to achieve annual capital efficiencies of approximately $1 billion through the elimination of redundant spending and targeting capital budgets to high-return, near term projects. As part of this cost-saving there will be some job losses, said Rick George, president and chief executive officer of Suncor, during the news conference. Under the merger agreement, George will assume the same role within the combined entity.

"Part of realizing efficiencies means that this merger will involve some job losses where we have significant overlap. This will be difficult, but one of the many things that Suncor and Petro-Canada share is a strong history of treating people with fairness and respect," he said. "I want to assure all employees that this will be the case going forward. Once the deal closes, we’ll work hard to complete the staffing process quickly to minimize the uncertainty for our people."

The Canadian government, which could veto the deal, has signaled its support, according to people familiar with the matter who were cited by the Wall Street Journal. The proposed merger must be approved by Suncor and Petro-Canada shareholders, reach compliance with the Competition Act, along with the satisfaction of other customary approvals including regulatory, stock exchange and Court of Queen's Bench of Alberta approvals, according to the companies' statement.

Oil-industry watchers have predicted a wave of mergers prompted by falling oil prices, which have left smaller companies cash hungry, while tight credit has made it difficult for well-capitalized companies to find financing for big deals, the report stated.

Suncor and Petro-Canada, both headquartered in Calgary, Alberta, have seen the effects of falling energy prices -- both companies' shares are down more than 60 percent from their 52-week highs, and both were forced to cut spending. In December, Petro-Canada said it was cutting spending by about a third to approximately $3.2 billion in 2009, the newspaper reported. Suncor also announced a one-third spending cut, to roughly $4.8 billion.

The merger would enable the companies to eliminate more costs, according to the report. Petro-Canada produces more oil than Suncor, and had a larger operating profit last year, yet its revenue was a bit smaller, the report stated.
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