Shell to Buy Pennzoil-Quaker State


With its proposed purchase of Pennzoil-Quaker State Co., the Royal Dutch/Shell Group would be neck and neck with ExxonMobil for the title of worlds biggest lubricant company.

But Shell apparently intends to mount its challenge without the help of hundreds of existing Pennzoil-Quaker State employees. Shell officials said they plan to eliminate 15 percent of the companies combined forces in lubricants. Pennzoil-Quaker State employs 7,400 people worldwide, compared to 800 for Shells U.S. lubricant operations.

The deal, reportedly worked out in just a matter of weeks, gives Shell the premium passenger car motor oil brand it sought as it ramps up its U.S. lubricants business. Shell recently announced big plans for that business, after acquiring sole ownership of Equilon Lubricants, part of its former joint venture with Texaco.

The Equilon buyout gave Shell rights to use Texacos Havoline motor oil brand until mid-2003 but Shell acknowledged it would need a stronger name after that period ended. Its own FormulaShell claims a 3 percent market share. Two weeks ago, Shell officials told Lube Report that the company would either buy a well-recognized brand or introduce its Helix products, which have a strong presence in Europe, to the United States.

As it turned out, the company acquired two leading brands. Pennzoil and Quaker State rank first and second in the United States, with a combined market share of 36 percent. Shell officials said those brands would complement its sales in the diesel engine oil segment. Shells Rotella is one of two dominant U.S. diesel engine oils – Mobils Delvac being the other – with a 20 percent market share.

ExxonMobil and Shell rank first and second, respectively in lubricant production in both the world and the United States. Shell representatives said the company is still crunching numbers to determine how its U.S. operations would compare to ExxonMobils if the Pennzoil-Quaker State purchase is approved. Kline & Co. consultants, of Little Falls, N.J., said Tuesday that Shell would surpass ExxonMobil in terms of global lube production. Shell would run a close second, according to Fuchs Petrolub AG. The Mannheim, Germany, lubricant producer estimated recently that ExxonMobil produced more than 5 million metric tons in 2001, compared to 3.5 million or 3.6 million metric tons for Shell and 1.3 million to 1.4 million for Pennzoil-Quaker State.

Acquisition of Pennzoil-Quaker State would also give Shell a dominant position in the quick lube market. Pennzoil-Quaker State owns Jiffy-Lube, which has more than 2,100 locations, more than twice as many as any other chain in the United States. Pennzoil 10-Minute Quick Lube is the second-biggest chain, with just over 800 sites.

Shell representatives said management has not yet decided what jobs would be eliminated, but the company did say it expects to close lube blending plants. Worldwide, Shell has 74 blending plants, compared to Pennzoil-Quaker States 14. In the United States, however, Pennzoil-Quaker State has 10 plants to Shells eight. The combined companies would have plants in close proximity in the Gulf Coast, Northwest, Midwest and Mid-Atlantic regions, as well as Southern California.

Pennzoil-Quaker State employees might be encouraged that Shell has expressed admiration for their companys marketing acumen and indicated that it sees Pennzoil-Quaker State as more than a motor oil acquisition. In recent years, Pennzoil-Quaker State has divested most of its refining operations and transformed itself into an automotive consumer parts marketer, selling everything from air fresheners to flat tire kits.

Shell has said that it sees the value of our strategy of being the total answer to car-care products, Pennzoil-Quaker State spokesman Ray Scippa said. It has also expressed high regard for our marketing performance – things that we do in areas such as category management. It appears they are looking forward to bringing those kinds of skills into Shell.

Shell agreed to acquire Pennzoil-Quaker State for $1.8 billion in cash, plus $1.1 billion in assumed debt. Shell would pay $22 per share of Pennzoil-Quaker State stock, which represents a 42 percent premium on Fridays closing price of $15.49.

Rumors that Shell would buy Pennzoil-Quaker State have circulated the lubricants industry for the past few years, but Scippa said talks actually began just a few weeks ago. Shell first contacted Pennzoil-Quaker State President and Chief Executive Officer Jim Postl Feb. 22, he said.

At that time, [Postl] told them the company was not for sale, Scippa said. Shell came back again later with an offer that was then taken to the board of directors.

Shell said it does not expect the U.S. Federal Trade Commission to set any conditions for approval of the acquisition. The company expects the deal to be completed during the second half of this year.

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