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The Scotsman: Total bid for Shell is oil to the City gossip mill

The Scotsman: Total bid for Shell is oil to the City gossip mill

“Desmarest could make an audacious swoop for the Royal Dutch half alone – which itself is smaller than Total – and, therefore, would have voting control over the entire group.”




Tue 17 Aug 2004

THERE have been some pretty wild takeover rumours in the City this summer, but few appear more outrageous than current whispers that Total might swoop for Shell.

The French company is much smaller than its UK-Dutch rival, with a market cap of £68 billion compared with £94bn. First impressions dictate that Total surely could not raise the cash, much less justify the buy to shareholders.

Another stumbling block is the extraordinary price of oil. The black gold was down slightly yesterday on the referendum success of Venezuelan president Hugo Chavez, but it remains close to Friday’s all-time highs at $46.05 a barrel.

The last time the industry experienced any mega-mergers on this scale was back in the late 1990s – when oil prices were at all-time lows of $12. This would suggest that the rumour-mongers are bonkers to be suggesting a return to consolidation in the current climate.

Total’s finance director, Robert Castaigne, seemed to agree with this on 5 August. He said that oil prices did not justify acquisitions – and the levels have risen since then.

Yet Shell’s shares managed to close up 2.2 per cent yesterday at 399p, showing that at least some investors are giving the story a bit of respectability.

This has partly to do with the fact that it is mid-August, when half the City goes on holiday and the other half twiddles its thumbs all day.

But there are more substantial reasons that the rumours could be more than just idle talk, not least the issue of global competition.

Total must feel it is a pretty good fit with Shell and would be unlikely to attract many raised eyebrows from the competition authorities if it were to make a bid.

The French firm has no presence in the US, while its strength in the Middle East would do much to bolster Shell’s operations in the area.

We know Shell is interested in the oil-rich region. Just yesterday it confirmed its intention to research on two major oil fields in Iraq.

Then there are the respective management teams of the two firms. Shell may have replaced – and handsomely paid off – the main culprits in its oil reserve booking scandal, but investors cannot fail to be suspicious of those that have come up to replace them.

In contrast, Total’s chief executive, Thierry Desmarest, is regarded as one of the superstars of the sector. He has the precedent of launching a hostile bid against Elf and is known to be frighteningly ambitious. A company with assets as strong as Shell’s could benefit from Desmarest’s command.

The above evidence doesn’t answer the matters of the cost of the deal and oil price highs, but there are ways of getting around these two obstacles.

Most significantly, there is the presence of so-called priority shares in Royal Dutch – stock with special voting powers that override shares in UK-based partner Shell.

Some analysts suggest that Desmarest could make an audacious swoop for the Royal Dutch half alone – which itself is smaller than Total – and, therefore, would have voting control over the entire group.

The priority shares are set to be scrapped at Royal Dutch’s 2005 annual general meeting, but that still leaves plenty of time for an audacious swoop.

Furthermore, there is plenty of room for ramping up the debt levels of both Total and Royal Dutch – both companies with unusually low gearing.

This brings us to the oil price. There is an argument that the environment that sparked deals like the BP-Amoco tie-up was less about the low price of oil, but that it was at an extreme.

Markets abhor uncertainty and the current price of more than $46 has been growing for so long that even the most sceptical oil chiefs are beginning to wonder whether it will ever head back down again.

At $12 a barrel, directors could justify a tie-up because even the biggest firms could be bought relatively cheaply.

At $45, a merger can be justified because sector giants are experiencing strong cash-flow. If oil prices stay high, then a multi-billion payout could be termed worthwhile.

So after all this reasoning, will it happen? Investec’s Bruce Evers reckons probably not. “Its not impossible, but its highly unlikely,” he notes.

Dresdner Kleinwort Wasserstein is similarly sceptical, giving the deal a less than 10 per cent chance of going through. It says: “Total’s chief executive is undoubtedly ambitious, but Shell is scarcely a lame duck.”

It goes on to point out that the UK-Dutch company has practically recouped most of its share price losses following the reserve downgrades.

The prospect that Total could swoop for the Royal Dutch division alone is probably the only way the deal could go through, but it would be extraordinarily cheeky move as well as ambitious.

Not that similar ambition has been absent from the market elsewhere. No-one had raised as much finance single-handedly as Philip Green did, while an HBOS swoop for Abbey still looks ludicrous.

The bank hasn’t yet managed to integrate the customers from the Bank of Scotland “merger” in 2001, so how long would it take to bring the Abbey punters in line? The phrase about eyes being bigger then stomachs comes to mind.

So will Total bid for Shell? Probably not, but hold on to the shares just in case.

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