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Just when it appeared merger activity among the Big Oil companies was slowing down, Phillips Petroleum Co. and Houston-based Conoco Inc. yesterday announced a $35 billion deal that would create the nation's third largest integrated oil company. Pending regulatory and shareholder approval, the deal would create a corporation with more than $60 billion in assets, and is expected to close during the second half of 2002. The new company will also assume $18.6 billion in debt, according to the Associated Press. The combined company, to be called ConocoPhillips, will be based in Houston and operate approximately 5,000 company-owned convenience stores and a branded network of more than 15,000 units. The company also plans to keep a reduced presence in Bartlesville, where Phillips employs 2,400 at its headquarters and research facility. "This is really a growth story for Conoco and Phillips," said Conoco chairman Archie Dunham, who is delaying a planned retirement to serve as chairman of the combined company. "We think this is the best way to create long term and short term value for our shareholders."Phillips chairman James Mulva will be chief executive and president of the new company and become chairman when Dunham retires in 2004. ConocoPhillips would be the nation's third-biggest oil and gas company in terms of production and the fifth-largest refiner in the world. The two have combined work force of 58,000 worldwide and expect to save at least $750 million by merging. Mulva said most of the savings should come from realized operating efficiencies instead of job cuts, but said some jobs will be eliminated in Bartlesville. He didn't say how many cuts would be implemented. Under the terms of the deal, Phillips shareholders will get one share of each of ConocoPhillips stock for each Phillips share they own. Conoco shareholders will get .4677 shares of the new stock. The merger is expected to be tax-free to shareholders. Phillips shareholders will end up with a 56.6-percent stake in the company, despite the fact that both companies characterized the merger as one of equals, the report said. The new board will have 16 directors -- eight from each company -- including Dunham and Mulva. The merger should result cost savings in refining, marketing and transportation and more capital to fund worldwide exploration and production, the two men said during a teleconference. Merger talks began in earnest about six weeks ago, Dunham said. Both have been rumored merger candidates for years. Phillips had tried to unload some of its refining and marketing operations in a deal with Conoco that fell through in 1996. Phillips has engaged in a flurry of growth acquisitions after being among the smaller integrated companies for decades. Earlier in the year, Phillips acquired Tosco Corp. for $7 billion in stock, creating the nation's second-largest oil refiner and a gasoline retailer with more than 12,000 stations. Last year, it merged its gas gathering and processing operations with Duke Energy and acquired production assets in Alaska jettisoned by BP Amoco to secure approval of its acquisition of Atlantic Richfield. Phillips also combined its chemicals division with ChevronTexaco Corp. Earlier this year, Conoco acquired Gulf Canada Resources. The company also operates nearly 6,000 miles of pipelines in the United States and has stakes in nine refineries in the United States, Europe and Asia. It operates more than 7,000 gas stations in Europe, Thailand the United States. Together, ConocoPhillips would have combined reserves of 8.7 billion barrels of oil equivalent and daily production of 1.7 million barrels. -30-Missouri's Gray AreaState sued over 'gray market' provisions of tobacco law.KANSAS CITY, Mo.In a ruling that could affect convenience store and petroleum marketers throughout Missouri, the Dirt Cheap Cigarettes and Beer Co. wants the Cole County Circuit Court to extinguish part of the state's new tobacco law. In a lawsuit, D.C. Inc. complains the law, which prohibits tobacco use by minors, also illegally cancels a part of the company's business: selling so-called gray market cigarettes, according to the Jefferson City News Tribune.Those cigarettes are manufactured outside the United States, by or through the major U.S. tobacco companies. The lawsuit contends they may be legally imported into the United States. Those cheaper prices allow dealers, such as Dirt Cheap, to stay competitive in the U.S. market.Fred Teutenberg, Dirt Cheap's president, told the Associated Press the state law allows large tobacco companies to have too much control over the distribution and sale of cigarettes."Our point is that the major cigarette companies are trying every way they can to control the retail price of cigarettes," Teutenberg said. "It is unfortunate that the state wants to enact an unconstitutional piece of legislation benefiting only big tobacco at the detriment of small business and the Missouri consumer."Teutenberg asked the court to eliminate the gray market portions of the law, or to cancel the entire law.