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Shell agrees to buy Pennzoil

Shell Oil will pay $1.8-billion to buy Pennzoil-Quaker State Co., the nation's largest motor oilmaker and parent company of more than 2,000 Jiffy Lube oil change service stations across the country.

The deal calls for Shell, a unit of Royal Dutch Petroleum Co., to pay $22 for each share of Pennzoil-Quaker State and assume $1.1-billion of the Houston company's debt, Shell said Monday.

The deal has been approved by Houston-based Pennzoil-Quaker's board and expected to be completed during the second half of 2002 but is subject to regulatory and shareholder approval, both companies said.

The per share price represents a 42 percent premium over the $15.49 closing price of Pennzoil-Quaker shares on Monday. The deal was announced after the stock markets closed, and shares of Royal Dutch closed down $1 at $52.80 Monday on the New York Stock Exchange.

Rob Routs, Shell Oil Products president and chief executive, said the deal will generate annual cost savings of about $140-million by 2004.

Pennzoil-Quaker State chief executive Jim Postl called the deal an effective way to leverage his company's name recognition.

"Pennzoil-Quaker State will benefit significantly from being part of an enterprise with the geographic scope, operational scale, breadth of products and services, and financial resources necessary to compete in a consolidating industry," he said.

Royal Dutch/Shell Group managing director Paul Skinner, who also is chief executive of the company's oil products business, said the deal will make Shell a leader in the U.S. and global lubricants market.

Pennzoil-Quaker State is the United States' biggest producer of motor oil, including the Pennzoil and Quaker State brands. It's Jiffy Lube brand has more than 2,150 locations across the United States.

Shell Oil, also headquartered in Houston, explores, produces and markets oil, natural gas and chemicals. It has reserves of 1.2-billion barrels of oil and 1.9-trillion cubic feet of natural gas. It owns Shell Oil Products U.S., which was formerly Equilon, as well as operates a refining and marketing venture with Exxon Mobil and Saudi Aramaco called Motiva.

Its parent company, Royal Dutch/Shell Group, is the third-biggest petroleum company in the world. Exxon Mobil and BP are the first and second largest, respectively.

Shell is something of a latecomer to the consolidation in the oil industry. BP and Exxon Mobil moved aggressively in the late 1990s to buy and grow. But Shell hung back, preferring to streamline its operations, industry analysts said. It had considered buying some companies, including Enron in the late 1990s. And in a few cases, its advances were thwarted, most notably when it lost out to the Williams Cos. for the natural gas producer Barrett Resources.

While other companies have mainly bought businesses that produce natural gas and oil, Shell, for the time being at least, seems to be trying to strengthen its position in refining and retail sales of petroleum products.

The company last year bought Texaco's stake in their Motiva refining joint venture. Also last year, along with the Saudi national oil company, it bought Texaco's stakes in the oil refining and gasoline marketing businesses Equilon and Motiva for $1.2-billion.

The purchase of Pennzoil thrusts Shell into a "very competitive, very tough business," said Kate Warne, an oil analyst with the brokerage house Edward Jones. "I think of Pennzoil as more of a consumer products business than an oil company."

Warne said she thought Shell overpaid "somewhat" for Pennzoil, and she said the company would have to explain to analysts how its foray into ventures like Jiffy Lube would add to its bottom line.

Given Pennzoil's colorful history of scrappy moves, it is little wonder Shell had to pay a healthy premium.

Pennzoil began as Zapata Petroleum, which was formed by the brothers J. Hugh and Bill Liedtke and a young George H.W. Bush. Bush moved on in the late 1950s and away into the world of politics. The Liedtkes, for their part, made history as early corporate raiders.

In 1965, Hugh Liedtke organized the takeover of United Gas Pipeline, a company five times the size of Pennzoil. In 1983, he moved to buy Getty Oil. Texaco grabbed the company, but Pennzoil sued for $10.5-billion in damages. The fight bankrupted Texaco, which settled with Pennzoil for $3-billion.

About a decade later, Pennzoil tried to take over Union Pacific Resources but failed. Union Pacific then tried to take over Pennzoil in 1997, touching off months of litigation that ended when Union Pacific withdrew its claims. Finally, in 1998, Pennzoil and Quaker State merged.

_ Information from the Associated Press and New York Times was used in this report.