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Royal Dutch/Shell to merge

From our October 2004 Shell News Archive

Royal Dutch/Shell to merge

Netherlands HQ ‘not a victory for the Dutch’: “Yet Shell’s governance scheme wasn’t without a few surprises, chiefly that the headquarters will be based in The Hague, Netherlands along with two of the group’s three main businesses.”

By Emily Church,

Oct. 28, 2004

LONDON (CBS.MW) — Oil major Royal Dutch Shell on Wednesday said it plans to merge its Dutch and U.K. companies, breaking close to a hundred year tradition as a dual Anglo-Dutch group.

The move was expected and follows shareholder outrage after a shock downgrade of proven oil reserves in January. Yet Shell’s governance scheme wasn’t without a few surprises, chiefly that the headquarters will be based in The Hague, Netherlands along with two of the group’s three main businesses.

The plans also set the primary listing for the shares in London, prompting a rally in Shell’s U.K. stock (UK:SHEL: news, chart, profile) as investors looked ahead to a weighting of 8 percent to 9 percent for Royal Dutch Shell in the FTSE 100. Shell’s U.K. shares currently have a 3.6 percent weighting in the benchmark U.K. stock index.

A greater FTSE weighting “is one of the reasons for the move” in Shell’s stock, but “the unification is a big, big plus… Shell was undervalued by at least 10 percent because of its lack of transparency, and all the problems attached with that,” said Lex Werkheim of Amsterdam broker Eureffect.

Some more disappointment on the state of Shell’s (RD: news, chart, profile) proven reserves were capping potentially greater gains for the stock, Werkheim said.

In its third quarter profits update on Wednesday, Shell (SC: news, chart, profile) warned that reductions to its 2003 proved reserves “are likely to be appropriate” following a review.

The group has flagged an additional 900 million barrels of oil equivalent for further review. Shell said its audited around 8 billion barrels of oil equivalent of the group’s reported proved reserves of 14.35 billion boe on Dec. 31 2003.

The sinking reserves scenario at Shell has raised investor concerns that the group will have to buy a company with reserves at a time of high valuations in the industry.

“The move is good from a corporate governance perspective,” said Andrew Archer, industry analyst at Commerzbank Securities. He added that the merger increases acquisition risk as it “increases the company’s ability to use its paper to buy other companies.”

Royal Dutch Shell said third quarter reported net income more than doubled on the year to $5.4 billion. Earnings on estimate current cost of supplies rose 70 percent to $4.4 billion – topping the average estimate by 6 percent.

Shell said earnings reflected higher hydrocarbon realizations, strong LNG and Gas-to-Liquids earnings offset by lower other income in Gas & Power, and higher downstream earnings in Oil Products and Chemicals.

Shell is expecting around 200 senior positions will be affected by the headquarters move to The Hague. On a conference call, the board members said Shell will maintain a “significant presence” in London, where the downstream businesses will be based.

No Dutch victory

John Kerr, named deputy chairman for the newly merged oil group, denied suggestions that putting the headquarters in The Hague marked a “victory for the Dutch” shareholders.

“It wasn’t a zero-sun game in negotiations” between the boards representing U.K. and Dutch shareholders, he said. “The common view among our advisors was for a clear, simple company… with a single CEO.

“Much more important than where is the headquarters is the concept of a single headquarters and not having a ludicrous duplication between two sets of corporate staff.”

The merger plans set that RD shareholders (NL:00947: news, chart, profile) will be offered 60 percent of the issued share capital of Royal Dutch Shell and ST&T shareholders will be offered 40 percent or the ‘B’ shares with dividends in British pounds.

Shell said that Jeroen van der Veer will become the first Chief Executive of the group.

Terms set that RD ordinary shareholders will be offered two ‘A’ shares in Royal Dutch Shell for every one RD share currently owned; and ST&T ordinary shareholders will be offered around 0.2874 ‘B’ shares in Royal Dutch Shell for every one ST&T share currently owned.

Shares of British rival BP (BP: news, chart, profile) (UK:BP: news, chart, profile) were down 0.5 percent in mid-morning London trade. Shares of Shell Trading & Transport – the London stock – were last up 6 percent at 449 pence.

Emily Church is London bureau chief of CBS.MarketWatch.com.

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