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Bloomberg: Royal Dutch, Shell Shareholders Vote to Combine (Update3)

Bloomberg: Royal Dutch, Shell Shareholders Vote to Combine (Update3)

Tuesday 28 June 2005

June 28 (Bloomberg) — Royal Dutch/Shell Group shareholders voted to merge its holding companies in the Netherlands and Britain, ending a century-old separation that investors said damaged what was the world’s largest publicly traded oil company.

The votes at Royal Dutch Petroleum Co. near The Hague and Shell Transport & Trading Co. in London today will disband companies that since 1907 had operated as one with separate stock- market listings and boards of directors. Shell’s U.K. shares rose 3.2 percent, the biggest one-day gain since Feb. 1.

A single share may let Chief Executive Jeroen van der Veer pay for acquisitions in stock for the first time, investors and executives said. Van der Veer is rebuilding a company that misled investors for years about the size of its reserves and still faces a Department of Justice criminal investigation and shareholder lawsuits over the matter.

“Shell needs this deal today to do takeovers, to basically find new fields through acquisitions,” said Bob Parker, a deputy chairman of Credit Suisse Asset Management in London, which oversees $335 billion. To replace oil reserves, “you’ve got two choices — you can either go into exploration or you can do takeovers.”

The new company, called Royal Dutch Shell Plc, will start trading on July 20 and will have its headquarters in The Hague and be incorporated in the U.K. Shell, the largest publicly traded company in 1998, has fallen behind Exxon Mobil Corp. and BP Plc in terms of revenue, production and reserves after those companies used shares for takeovers.

Van der Veer, a 57-year-old Dutchman, told reporters today that Shell currently is “not looking at large acquisitions as they are too expensive because of the high oil price.” He defined a large purchase as “$1 billion or more.”

Demand for Change

The merger will combine two companies that created what Shell calls an “alliance” on Jan. 1, 1907, when Henri Deterding of Royal Dutch agreed to bail out Marcus Samuel’s Shell oil- trading business, which was struggling with too much debt. Samuel had resisted an outright sale of Shell, and the Royal Dutch/Shell venture was formed instead.

Demands from investors for change at Shell came after the company in January of last year said it overstated its oil and gas reserves for years. The admission led to more than $150 million in fines from U.S. and U.K. regulators, shareholder lawsuits and the departure of its chairman, finance chief and the head of exploration and production. Shell later lost its top-tier AAA credit ratings.

Since the merger was announced in October, Shell shares have outperformed those of BP as investors expected the one company will have a larger weighting in benchmark indexes. Shell’s weighting will rise because the new company’s market value, today at about $227 billion, will be 150 percent larger than that of the original U.K. owner.

The unification, announced in October, was approved today by 97.4 percent of Royal Dutch shareholders and 99.8 percent of Shell Transport shareholders. Annual general meetings and most board meetings will be held in The Hague from now on.

Morgan Stanley’s `Top Pick’

Shell Transport shares rose 17 pence to 545 pence in London while Royal Dutch Petroleum climbed 1.85 euros, or 3.5 percent, to 54.85 euros in Amsterdam. Among analysts, 35 percent recommend investors “buy” Shell shares, below the 53 percent with a similar rating for BP, according to Bloomberg data.

“Shell still looks good value compared to BP,” said James Laing of Aberdeen Asset Management in London, who helps manage about $6 billion in shares. Shell and BP both trade at about 12.4 times next year’s profit.

Morgan Stanley analysts including Neil Perry in a note today said Royal Dutch/Shell was among its “top picks” of European oil companies, because of Shell’s strong refining business, potential stock buybacks, relative valuation to BP and other reasons.

“We believe that the industry is going through a phase of massive change, driven by the lack of access to new resources,” the analysts wrote. As companies expect oil prices to stay higher, “we think that there could be a wave of large-scale mergers and acquisitions, effectively a repeat of the 1999 to 2001 period.”

When the new shares start trading on July 20, Royal Dutch Shell Plc and BP will together make up about 18 percent of the FTSE 100 Index, analysts at Dresdner Kleinwort Wasserstein said in a June 20 report. They constitute about 14 percent now.

Nothing New

Shell has paid cash for acquisitions throughout its history, avoiding transactions such as BP’s $56 billion stock purchase of Amoco Corp. in 1999 and the $31.8 billion acquisition of Atlantic Richfield Co. in 2000. Irving, Texas-based Exxon Corp. in December 1998 agreed to buy Mobil Corp., for $79.3 billion in stock and assumed debt.

The new stock “is a tool in our armory that we didn’t have before,” Malcolm Brinded, the head of exploration and production at Shell, said today. “It doesn’t mean that anything is imminent.” He said that Shell will consider takeovers.

Calls to scrap the parent companies have lingered for years. Rather than seek mergers as prices in 1998 slid toward $10 a barrel, then-Shell Chairman Mark Moody-Stuart announced a plan to sell chemicals assets and weed out $2.5 billion of costs. He said then that “nothing is sacred,” including dual ownership. Oil prices recovered and the pressure for change passed.

Oil prices now around $60 a barrel and rising energy demand in Asia are making acquisitions more expensive. Chevron Corp., the world’s fifth-largest publicly traded oil company, and CNOOC Ltd., China’s biggest offshore oil producer, are fighting for Unocal Corp. CNOOC last week offered $18.5 billion for Unocal, seeking to thwart a Chevron accord to buy the company.

Shell’s falling oil and gas reserves will take years to replenish as fields mature from Oman to the North Sea to the Gulf of Mexico. The company’s five-year goal is only to replace each barrel of oil and gas that is pumped from the ground.

Brinded said he was “reasonably confident” of that goal, which would be achieved through “organic” growth of Shell’s own projects plus some “normal” acquisitions of smaller oil companies, but “not multi-billion” dollar purchases.

Potential Targets?

Shell had 11.88 billion barrels of proven reserves at the end of 2004, a spokeswoman said. That’s enough to last about 8 1/2 years, based in its 2004 production rate. Exxon Mobil’s 21 billion barrels can last 13.6 years, while BP’s 18.3 billion barrels will last 12.7 years, according to Bloomberg data.

Potential acquisition targets include London-based BG Group Plc, whose chief executive, Frank Chapman, said April 4 he’s being asked “about once a week” if his company is an acquisition target. Occidental Petroleum Corp. Chief Executive Ray Irani said any offer for his company would have to be about $40 billion in cash, a 29 percent premium to its last close, according to a June 5 report in the Los Angeles Times.

Van der Veer on April 28 said he prefers to expand Shell’s own projects because high oil prices make energy acquisitions too costly for now.

Shell bought Enterprise Oil Plc, Britain’s largest independent producer, for $7.3 billion in June 2002 and Pennzoil- Quaker State Co. for $2.9 billion in March 2002.

The Shell Transport chairman, Ronald Oxburgh, said Shell isn’t considering making an offer for Unocal or for a company of that size.

“This sort of deal is not on our radar screen,” he said today.

To contact the reporters on this story:

Stephen Voss in London at [email protected]

Dale Crofts in the Netherlands or [email protected]

http://www.bloomberg.com/apps/news?pid=10000102&sid=ajYVLH.fnMRw&refer=uk

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