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Total takeover of Shell? Analysts aren’t buying it

ChannelNewsAsia: Total takeover of Shell? Analysts aren’t buying it

“A hostile takeover leaves the door open to a hostile counter takeover, and at that point, Royal Dutch is better placed financially to bid for Total than Total for Royal Dutch.”

16 August 04

PARIS: Amid speculation the French oil group Total could attempt a hostile takeover of rival Royal Dutch/Shell, remarks by a top Total executive and market analysts suggest the time is not right for such a move.

Total declined to respond directly to what it called market rumors, but a group spokesman referred to comments by financial director Robert Castaigne on August 5, when he said periods of high oil prices were not opportune for major acquisitions.

The spokesman said Monday: “A company like Total doesn’t change its strategy in the space of 10 days.”

In Paris and London, oil analysts deemed a hostile takeover bid possible since Total is in good shape financially, but said Shell’s complex corporate structure, competition questions and other financial factors weighed against it.

“The arbitrage problems would be enormous and the sector of groups quoted on two different market places is extremely complicated,” said Irene Himona of Morgan Stanley.

Shell, the fourth biggest oil group worldwide, has a two-part structure split between the Netherlands and Britain.

Royal Dutch is quoted in Amsterdam, holds 60 percent of the company and has a market capitalisation of 83.7 billion euros (102 billion dollars).

The remainder is owned by Shell Transport, quoted in London with a value of 38 billion pounds (56 billion euros, 69 billion dollars).

Both groups are run by a single executive board that is overseen by supervisory boards from each of the component companies.

That poses an unprecedented situation in the event of a hostile takeover bid, according to the British Competition Commission.

“Any authority at this point would certainly be wanting to keep its options opened as to whether you treated Shell and Royal Dutch as one entity or not and whether you could takeover one part of the both or not”, a commission spokesman said.

A Paris analyst added: “Though a hostile takeover of one of the two structures is possible legally, it seems completely unlikely since even if there aren’t many problems at the exploration-production level, downstream distribution is impossible.”

“It makes no sense to imagine Total taking over one of the entities because it would have to undo synergies and consolidations, a huge task from a financial point of view.

“I don’t see how you could give 40 percent of refining operations to Shell and keep 60 percent.”

Having said that, anything was possible, the analyst acknowledged, “but for there to be a tie-up, it would have to be very, very friendly.”

“A hostile takeover leaves the door open to a hostile counter takeover, and at that point, Royal Dutch is better placed financially to bid for Total than Total for Royal Dutch.”

Even if the French group sold off all non-strategic assets, it would have to raise around 150 billion euros for Shell, “whereas market conditions are not favorable,” the analyst opined.

Another analyst described a Total bid as “vaguely inconceivable”, while Dresdner Kleinwort Wasserstein said Shell “is probably too big to swallow”.

Moreover, a deal between two of the world’s biggest oil companies would run up against potentially insurmountable regulatory hurdles.

Arguing in favor of Total is its strong financial condition, based in part on an enviable position with respect to crucial future reserves.

“Total has done better than its rivals,” noted the Dutch financial group ING, which estimates the French firm will increase production by six percent in 2006 and 2007, breaching three million barrels per day in 2008.

The French group’s production portfolio, spread over 43 countries concentrated in Africa and the Middle East, includes large-scale projects under development that ING said “offer attractive growth perpectives”.


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