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Globe and Mail (Canada): Royal Dutch eyes boosting Shell bid

ANDREW WILLIS AND DAVID EBNER
From Friday’s Globe and Mail

TORONTO AND CALGARY — Royal Dutch Shell PLC is dangling the prospect of a 15-per-cent-plus bump in its $7.7-billion offer for oil patch subsidiary Shell Canada Ltd. if minority shareholders agree to support its takeover bid, according to institutional investor sources.

Frustrated in its attempts to drum up interest in a $40-a-share offer made in October, and fearing a nasty takeover battle, Royal Dutch has been quietly meeting with the biggest shareholders in its Calgary-based offspring in recent weeks. According to money managers in Toronto and Calgary, the parent company is holding out the promise of $46 to $48 a share if institutions agree to commit their shares.

“The push from [Royal Dutch] is for a lockup to an offer in the $46 range from several of the largest shareholders,” said one institutional shareholder in the Canadian company. Several financial and oil patch sources said Royal Dutch wants to win support from major shareholders that include Capital Research and Management of Los Angles, Calgary’s Bissett Investment Management and Jarislowsky Fraser Ltd. of Montreal.

At the top end of the forecast range, it would cost Royal Dutch $9.2-billion to buy out its Canadian subsidiary. The Netherlands-based parent is one of the world’s largest oil companies with a $218-billion (U.S.) market capitalization. It already owns 78 per cent of Shell Canada and said in October that while it wanted to own the entire company, it would not proceed with a takeover unless it had majority support among minority shareholders.

Jarislowsky president Len Racioppo said his firm had not been contacted by Royal Dutch, but he has heard talk of overtures to other investors.

Jarislowsky is one of Shell Canada’s largest shareholders with a 17-per-cent minority position. It has written to the independent directors of the Canadian company to give them its view on value — which Jarislowsky calculates is much more than $40 (Canadian) a share.

“The issue with Shell Canada is the long life of many of its assets, including the oil sands and its properties off the Queen Charlotte Islands,” Mr. Racioppo said. “Depending on your assumptions for energy prices, you can get values that range from the $40 levels through the $50 levels.”

One Calgary source also said the $46-to-$48 range is where the two sides may come together, adding that the Shell Canada board of directors and its financial adviser, CIBC World Markets, were close to making an announcement.

Jon Rigby, an analyst at UBS Securities in London, said in a Jan. 5 report that Shell Canada was expected to report soon on a “view of where fair value lies.” He said with Shell Canada’s stock trading higher than $40, “we must conclude there is upside risk to the purchase consideration of $7.7-billion.”

Stock of Shell Canada has traded higher than $40 since Royal Dutch made its offer in October, and Thursdayterday climbed 75 cents or 1.7 per cent to $44.08 on the Toronto Stock Exchange, its highest close since the offer. In October, Bissett analyst Garey Aitken called the $40 bid “not sufficient. There’s a lot of hidden asset value.” The stock’s all-time high is $47.19, reached last January.

If Royal Dutch presses ahead with a takeover without minority shareholder support, sources say the European company would face a battle with disgruntled investors unhappy about a transaction last March when Royal Dutch paid $465-million for about 900 square kilometres of Alberta oil sands leases.

Shell Canada minority shareholders would suggest that those properties should have gone to the subsidiary, and that not owning the leases has diminished the Canadian company’s value now that the parent is trying to buy it in, the sources say.

“There may be sideshows here, but when you boil it down, this negotiation is all about the money,” said one investment banker who expects Royal Dutch to raise its bid, as most other companies have done in order to win approval for takeovers of subsidiaries.

For Royal Dutch, the main reasons for buying the portion of Shell Canada it does not own is to better integrate the company’s oil sands operations into its global refining network without having to deal with minority shareholders.

In October, the parent said it would look at processing raw bitumen from Alberta in the United States or internationally. Such a decision could affect royalties and jobs in Alberta, and at Shell Canada’s Ontario and Quebec refineries.

Royal Dutch is also trying to bounce back from its overstated reserves scandal earlier this decade. In December, it was forced to halve its 55-per-cent stake in the gigantic Sakhalin Island project in Russia near Japan, handing over control of the $22-billion (U.S.) project for $7.5-billion to OAO Gazprom, which is controlled by the Kremlin.

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