TotalFina, France''s largest oil company, has initiated a euro 42 billion ($42.97 billion) stock bid for its French rival Elf Aquitaine by offering four of its own shares for three in Elf. In an immediate response, Elf issued a statement branding the bid as "hostile" and "not in the best interest of shareholders".

TotalFina''s 4:3 offer, at the 2 July closing share price of euro 128 for TotalFina and euro 145.9 for Elf, works out to a bid value of euro 170.7 per share, reflecting a premium of 17 per cent. TotalFina''s offer, however, is more modest at 15 per cent.

TotalFina chairman Thierry Desmarest said in a statement the project was driven by the "exceptional strategic fit" of the two groups. "I believe that it is necessary today to join forces to assure continued solid growth and to take our place as an oil major of the first rank at a time when the industry is restructuring on a global scale," he said.

The first salvo in a protracted battle to come came from Philippe Jaffre, chairman of Elf Ataiquitaine, who declared, "TotalFina''s bid will fail." In a strongly worded and emotional address to senior executives at Elf''s La Defense headquarters, he said TotalFina was approaching Elf to "do its shopping and to look for what it lacks". He described TotalFina''s all-share offer as "over-simplified", "vague" and "very much aimed at the financial community".

Meanwhile, in a significant development, French finance minister Dominique Strauss-Kahn said he favoured TotalFina''s hostile takeover bid because it would protect the companies from a US or British acquisition. "I think it is a good thing if a French group is nearly on the same level with the world''s three biggest oil groups and, therefore, protected from a takeover by an Anglo-Saxon or American company," he said. The French government holds one share in Elf, termed as a "golden share", which grants it veto power.

Though the Elf chairman gave no precise indication of how the company would react to TotalFina''s offer, he said the bid would accelerate the implementation of Elf''s own strategic plans. This would involve "a major project in which Elf and its employees will be masters of their own destiny", he said.

Markets speculation on how Elf may thwart TotalFina''s offer is based on the possibility of Elf acquiring a small energy group to increase TotalFina''s offer or negotiating a friendly deal with TotalFina, finding a white knight and attempting a counter-bid.

Analysts discount the possibility of the second option, as the French government is keen on an all-French deal. Moreover, Elf ''s recent failure to buy Norway''s Saga Petroleum in the face of Norwegian opposition will serve as a timely reminder of the dangers of taking on the role of white knight, they say.