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Financial Times: Lombard: Shell game that keeps investors guessing

Financial Times: Lombard: Shell game that keeps investors guessing

Tuesday 28 June 2005

By Martin Dickson

Forget Suduko. The mind-boggling numbers game that is currently occupying fund managers is how to rearrange holdings of Royal Dutch and Shell following expected shareholder approval on Tuesday of the merger of the Dutch and British companies.

Effectively, unification will bring a £73bn colossus, in the shape of Royal Dutch, onto the top table of the FTSE 100. At a stroke, the oil sector will gain a weighting of about one fifth of the FTSE 100, roughly equal to banks, making the UK market even more defensive, concentrated and top heavy than it has been until now.

Fund managers may also find themselves seriously underweight Royal Dutch Shell shares when they begin trading on July 20. With just 40 per cent of the combined Royal Dutch/Shell held in the UK, Shell currently represents under 4 per cent of the index, compared with BP, which is 10.1 per cent. But united with Royal Dutch, Shell’s proportion leaps to more 9.44 per cent, according to Deutsche Bank. It estimates rebalancing flows between European funds holding Royal Dutch and UK funds holding Shell may be upward of £48bn.

The Shell reweighting has been compared with Vodafone’s £100bn acquisition of Mannesmann in 2000, but that does not do justice to the complexity. For tax reasons – with a spoonful of national pride on top – the company will remain resident in The Hague, while a fully London-listed PLC. That means it has had to retain two shares on the FTSE – an A share, representing Royal Dutch, and a B share, representing Shell T&T. Already they are trading differently – there is a premium on the future B shares, because they are not subject to Dutch witholding tax on their dividend income.

If that does not make life difficult enough for fund managers, don’t forget the oil price. With crude above $60, no one wants to sell their Shell shares. The net result looks like a scramble for both A and B shares, which might underpin them for months to come. But that also means selling other stocks in the index to fund the acquisitions.

If sky-rocketing crude prices are ultimately likely to benefit the high-octane FTSE after Shell’s unification, don’t expect British Airways – or its passengers – to be toasting the success. BA has been the FTSE 100’s biggest faller since Friday, when it announced it was raising its fuel price surcharge by 50 per cent on longhaul flights and 33 per cent on short haul flights. Its surcharges are becoming a handy leading indicator. When it raises them, prices go even higher, as they did yon Monday when its new surcharges took effect. WTI hitting a new record of $60.75 a barrel.

So far, passengers – though sensitive about quoted fares – have taken the add-ons in their stride. That may be because on tickets they are lumped together with “taxes, fees, charges and surcharges,” and are easily overlooked. But JPMorgan notes that BA’s “charges” are now above £100, and yesterday’s increase represents a 5 per fare increase on the all important London-New York route this winter. Rival low-cost carriers are rubbing it in, by accusing network carriers of “gouging” passengers. They too, however, are not cutting fares as fast as they would like. It is surely only a matter of time before passengers begin to notice the effects and rein in their travel plans, just as they are tightening belts on the high street.

Against the odds PartyGaming’s initial public offering passed reasonably smoothly yesterday with a relatively high level of oversubscription for the shares and a price that had risen 11 per cent by the close of trading.

Ahead of the float some fund managers could barely contain their indignation that a company operating in such a legally inscrutable area such as online gaming would brave the London market. With internet betting in a legal limbo in the US – PartyGaming’s biggest market – they argued that the price was too high and the company too risky a bet.

Yet an IPO three times oversubscribed and a soaring share price on the first day of trading does not appear to bear out their pessimism. So what happened? Either the anti-PartyGaming rhetoric represented real concern from morally upstanding institutional investors concerned about the clear and present legal threats to online gaming. Or, more likely, investors were falling over themselves to get to the PartyGaming poker table but wanted to get the price down.

If this is what happened they were only partially successful. The price indicated in pre-IPO research was indeed cut. But once the PartyGaming roadshows got underway and orders began to be placed the price range of 111p-127p was safeguarded by the high level of demand.

With US funds not targeted, the IPO represents a real success for PartyGaming and its founders. What is less clear, though, given the regulatory threat and possible competition from other operators, is how long the group can sustain its growth.

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