Norsk Hydro Scores Coup

"Statoil paid too much," says Martin Molsater of the U.S. investment bank First Securities. On the basis of calculations of the value of Norsk Hydro's current oil and gas field assets, Statoil overpaid by 20 Norwegian Kroner per share, according to First Securities.

While bullish on the deal, Molsater points out that if oil prices continue to decline, investors in both companies have more to lose now that the plans have been announced. "What we'll see now with this transaction is that the decline will start from a much a higher level than before the merger plans were announced," he says.

Statoil has been pursuing a merger with Norsk Hydro's oil and gas operations for three years now. The last attempt at talks in late 2004 ended when the Norwegian state -- which owns 71% of the company and 44% of Norsk Hydro -- ended the discussions abruptly.

This time, however, the government is behind the merger plans. The Norwegian state is expected to take a 62.5% stake in the combined company, with a view to increasing that stake to 67% pending parliamentary approval. The newly combined company is expected to be valued at 600 billion Norwegian kroner, or $97.15 billion. Right now, Statoil has a market cap of 363 billion Norwegian kroner, or $58.59 billion, while Norsk Hydro is valued at 228 billion Norwegian kroner, or $36.91 billion.

There are still important aspects of the deal that remain to be ironed out, however. While analysts generally think Norsk Hydro's oil and gas division is a good strategic fit with Statoil's operations, investors are still waiting to see the companies' plans for combining operations and reducing costs.

One of the key factors will be successfully pairing Norsk Hydro's international exposure with Statoil's more regional focus. Right now, Norsk Hydro has more international exposure than Statoil, although the latter has been aggressively buying up positions this year in the Gulf of Mexico.

Statoil says the new company, to be formed officially in the third quarter of 2007, will continue this purchasing spree. "This is a merger driven by the ambition to grow, and this new company will definitely have growth ambitions," says Vice President Ola Morten Aanestad.

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