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Financial Post (Canada): Investors snub $40 offer from Shell: Shell Canada minority: ‘They are very clearly being opportunistic’

Published: Oct 24, 2006

CALGARY – Minority shareholders of Shell Canada Ltd. have given a thumbs down to Royal Dutch Shell PLC’s offer yesterday to pay $7.7-billion in cash for the remaining piece of its Canadian unit.

“I don’t think $40 is going to be the number,” said Len Racioppo, president of Jarislowsky Fraser Ltd., which owns 29.5 million shares, or about 17% of the minority stake.

“They are very clearly being opportunistic,” he said, noting the offer comes at a time of low natural gas prices and after Shell Canada announced high costs for a large oilsands expansion this summer that contributed to a sector-wide correction in share prices.

The Anglo-Dutch oil major, which owns 78% of Shell Canada, offered $40 a share for the rest. That’s 22% more than the closing price of the unit’s stock at the end of last week. Betting that Royal Dutch will be forced to raise its offer, investors sent Shell Canada’s stock up by almost 30%, to close above the bid price at $42.55 in Toronto on volume of 24.4 million shares, about 40 times the usual volume.

One Toronto-based hedge fund manager said short-term money was “absolutely” piling into Shell Canada’s stock.

“Most people think it gets done with a little bump,” he said, noting the buzz is that an offer of $46 per share is what will be necessary to get a deal accomplished.

Jeroen van der Veer, chief executive of Royal Dutch Shell, said the Calgary-based unit already accounts for 6% of group production and is expected to become an even bigger part of the global company as it expands its oilsands business. He said the deal would involve integrating the Canadian operation with the major’s large refinery presence in the United States.

“I see the proposal we have made to Shell Canada as the logical next step in the simplification of our company,” he said on a conference call. “Our intention is to fully integrate Shell Canada into our global business decision-making framework.”

The offer is the third significant move in about a month by an international oil heavyweight into Canada’s oilsands involving cross-border oilsands integration all the way to refined products. BP PLC is investing US$3-billion to retool U.S. refineries to take more Canadian heavy oil under contract, while ConocoPhillips linked up with EnCana Corp. to jointly develop oilsands reserves and expand refinery capacity in the United States.

Shell Canada, which has been operating in the country since 1911, is the only major unit not fully owned by Royal Dutch.

Garey Aitken, director of equity research at Bissett Investment Management, which owns 4.4-million shares, said it will take more than $40 a share to buy out Shell Canada’s minority shareholders, most of whom are “long-term patient money” institutions.

He said the move is the oil major’s boldest yet into the oilsands, where it has been expanding aggressively even while complaining costs have escalated.

Shell Canada holds 60% of the Athabasca oilsands project, which produces about 155,000 barrels a day. In August, it announced a 100,000 b/d expansion that could cost up to $12.8-billion.

Shell Canada purchased BlackRock Ventures Inc. for $2.4-billion last May, while Royal Dutch bought a large expanse of land on the outskirts of the Athabasca basin and formed a new wholly owned Canadian unit to develop it. Shell Canada also unsuccessfully bid for Deer Creek Energy Ltd, but was outbid by French rival Total SA, and was rumoured last year to be in pursuit of EnCana.

Glenn MacNeill, vice-president of investments at Sentry Select Capital Corp., which owns 100,000 shares, said the parent should offer more money to reflect the upside in long-term oil prices.

“I feel, at first glance, that we could have a little more juice reflecting a more bullish outlook for oil in the future,” he said, noting the Dutch parent is offering less for Shell Canada, based on reserves, than Shell Canada paid for Blackrock.

When Royal Dutch bid to take over minority shareholders in its U.S. subsidiary in the 1980s it had to increase its bid twice, and “it could happen again,” Mr. MacNeill said.

The Royal Dutch offer will actually require a fairness review by an independent committee appointed by Shell Canada’s board.

Clive Mather, CEO of Shell Canada, said in a statement that the board hired lawyers and financial advisors to prepare a formal valuation of the common shares of Shell Canada that is expected to take a number of weeks.

The offer is expected to affect other Canadian companies with oilsands assets.

Imperial Oil Ltd. and Husky Energy Inc. may be next in line to receive offers from their parents, analysts said. Imperial is 70%-owned by Exxon Mobil Corp., and Husky is 71%-owned by Hong Kong billionaire Li Ka-shing, either directly or through Hutchison Whampoa Ltd.

Shares of oilsands companies have been depressed due to lower oil prices and concerns about cost overruns.

“Certainly Exxon and Royal Dutch are very similar, in that they have majority interests in large Canadian integrated operations, both with lots of oilsands growth,” said Tom Ebbern, analyst at Tristone Capital Inc.

The offer also raises questions about the future of Western Oil Sands Inc., which owns 20% of the Athabasca project along with Chevron Corp.

Western has been talked about as a takeover target this summer, as its stock slumped due to Shell’s cost analysis and shareholder backlash over its plan to develop oil in Iraq.

“I don’t know if there is a lot of strategic rationale for them remaining as a stand-alone entity longer term,” next to such a huge player, said Mr. Aitken.

“I don’t think that they would really be bringing a lot to the table.”

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