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BP will buy U.S.-based renewable natural gas (RNG) producer Archaea Energy Inc for about $4.1 billion, the companies said on Monday, as the British energy major seeks to expand its alternative fuels business.
The deal will the largest ever RNG acquisition, topping Chevron Corp's $3.15 billion buyout of biodiesel maker Renewable Energy Group Inc earlier this year.
It will also be the largest acquisition BP has made since Chief Executive Bernard Looney took office in early 2020 with a pledge to slash BP's greenhouse gas emissions and oil and gas production while growing its renewables business.
RNG, or biogas, is gas captured from organic waste in landfills or farms.
Houston, Texas-based Archaea operates 50 RNG and landfill gas-to-energy facilities across the United States and BP aims to grow Archea's output five-fold by 2030 to 30,000 barrels of oil equivalent per day (boed), Looney told Reuters.
BP already has a large biogas business producing around 11,000 boed.
"This is a product that our customers want," Looney said. Utilities and transportation companies are seeking to reduce their carbon footprint want to use biogas as a fuel, he added.
"There's more demand for this product today than there is supply," he added, adding that the biogas sector is expected to grow 25 fold by 2050.
BP shares were down 0.4% by 1240 GMT.
BP has offered $26 in cash for each Archaea share, or $3.3 billion, and will take on about $800 million of net debt.
The offer represents a premium of 54% to Archaea's closing price on Friday. Archaea's shares jumped 53% in premarket trade.
But analysts at Jefferies said they "expect the deal to be met with concerns caused by the large premium, the high near-term valuation metrics and the potential impact on 2023 buybacks."
The deal will double the expected earnings before interest, taxes, depreciation, and amortization (EBITDA) from biogas to around $2 billion by 2030, BP said.
BP plans to invest $1.7 billion in the business by 2027 to accelerate its growth which will not change BP's overall capital expenditure plans, Looney said.
BP expects investment in renewables and its transition businesses to reach more than 40% of its total annual capital expenditure by 2025. BP plans to spend $14 to $16 billion in 2022, the majority of which going towards oil and gas.
BP said the acquisition will not impact its commitment to increase its dividend annually by 4% at oil prices of over $60 a barrel as well as its share buyback programme.
Jefferies disagreed and said the deal will impact BP's 2023 buyback outlook as it will reduce its surplus cash pool.
Bank of America advised Archea on the deal.
(Reporting by Ruhi Soni in Bengaluru; Editing by Anil D'Silva, Sriraj Kalluvila and David Evans)