PracticeConsultingBusiness – BP Amoco faces #11m goodwill hit

Business - BP Amoco faces #11m goodwill hit

BP Amoco could be hit by an #11m goodwill charge if its proposed acquisition of US-based Atlantic Richfield Company is successful.

The oil giant has confirmed it is in talks with Arco ‘concerning a possible combination transaction’, but refused to elaborate on its plans.

‘Such a large goodwill bill could take a large chunk out of any savings gained from combining the two companies’ extensive operations out in Alaska,’ warned one Big Five oil industry expert.

Under accounting rules outlined in FRS 6, the deal cannot be accounted for as a merger because Arco, which has a market capitalisation of $21bn (#13bn), is worth less than 15% of BP Amoco, whose value tops $120bn.

The newly merged company would be required to write off around $18bn of goodwill over the life of its oil reserves. As Arco has 13 years of production left, this would require a charge of more than $1bn a year.

City analysts said BP and Arco had already been working closely together in Alaska and there was very little overlap in operations. But some conceded that a takeover of Arco could yield #1.2bn in savings from merging headquarters and other operational costs.

Heading the negotiations for BP Amoco is chief financial officer John Buchanan, who took on the role when BP merged successfully with Amoco last year.

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