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The Globe & Mail: Shell minority investors bash bid: Say increased offer undervalues unit

DAVID EBNER

CALGARY — Minority shareholders of Shell Canada Ltd. aren’t happy with an increased bid from majority owner Royal Dutch Shell PLC for the portion of the company it doesn’t own, even as the new $8.7-billion deal was endorsed yesterday by Shell Canada.

Several minority shareholders, accounting for about 20 per cent of the shares not owned by Royal Dutch, said they wouldn’t accept the new $45 offer, which was increased yesterday from a $40 bid last October — worth $7.7-billion — that was roundly panned by Shell Canada investors.

“At $45, it’s a no for us,” said Len Racioppo, president of Jarislowsky Fraser Ltd., a large Shell Canada shareholder that controls almost 30 million shares and believes they are worth $50 or more apiece.

“When has a controlling shareholder ever offered full value to take out the minority? They never do,” Mr. Racioppo said.

“They want to get it for as little as they can.”

Royal Dutch, which owns 78 per cent of the company, said its improved offer is contingent on getting more than 50 per cent of the minority shares, which total about 180 million.

Royal Dutch is one of the world’s largest public energy companies and is reeling from losing control of the giant Sakhalin oil and natural gas project in Russia in December, forced to cede half its majority stake to Kremlin-controlled OAO Gazprom. Royal Dutch wants to expand in the oil sands and buying the minority stake in Shell Canada is a simple way to add reserves and production.

“Potentially they don’t get the majority, given a lot of people think the stock is worth something with a 5 on it,” said one New York investor with several million Shell Canada shares. “So it becomes a game. We’ll see how badly Royal Dutch wants it.”

For Canada, the takeover could be bad news, as Royal Dutch said in October it would like to process raw oil sands output in the United States or internationally, hurting job prospects in Alberta and at Shell Canada refineries in Ontario and Quebec. Shell Canada had planned to upgrade and refine oil sands in the country.

I.G. Investment Management Ltd. of Winnipeg, which owns more than six million shares, said it will not sell its stake, and 4.4 million shares held by Calgary-based Bissett Investment Management are not likely to be sold at $45.

AGF Funds Inc., with about three million shares, wasn’t impressed either, but wouldn’t say definitely that $45 wasn’t enough.

“There’s not an absolute answer,” said Charles Oliver, a senior vice-president at Toronto-based AGF, adding that he could take the money and reinvest the cash in other oil sands assets. “I think Shell Canada’s worth more but having said that, there’s only one obvious buyer. It’s very annoying as a shareholder to be suddenly squeezed out of a position. I would like to get a higher price, but having said that this could be a long slow painful process.”

Some investors say Royal Dutch would buy Western Oil Sands Inc. if it first completes the Shell Canada deal. Western owns 20 per cent of Shell Canada’s oil sands project and has hired financial advisers to consider a possible sale.

Royal Dutch yesterday called its $45 offer “full and fair” value for Shell Canada, which is how it described $40 in October.

Shell stock could fall to the low $30 range — where it was before the October bid — if Royal Dutch rescinds its offer, according to analyst Adam Zive of Desjardins Securities.

He said there is some “execution risk” for Royal Dutch given that some large shareholders want more than $50.

“While we expect that the bid could potentially be raised marginally, we doubt this is worth waiting for,” Mr. Zive said in a report, advising his clients to tender their shares.

Stock of Shell Canada rose 34 cents to $45.25 on the Toronto Stock Exchange yesterday, suggesting some investors think Royal Dutch will have to offer more to close the deal. The stock’s all-time high of $47.19 was reached about a year ago.

Yesterday’s bid was endorsed by an independent committee of Shell Canada’s board of directors, which had hired CIBC World Markets to help value the company. CIBC provided a verbal opinion to the committee that the bid was “fair from a financial point of view to [minority] shareholders.”

A takeover bid circular with details of the fairness opinion and valuation is expected to be sent to investors in early February.

Minority shareholders say valuing Shell Canada is difficult because of its vast undeveloped holdings.

“Shell Canada’s blessed with some excellent assets,” said Garey Aitken, a vice-president at Bissett. “The company’s done a wonderful job positioning themselves for the future.”

In October, Mr. Aitken called the $40 offer “not sufficient.” He wasn’t impressed with $45 either.

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Adding Shell up

Minority investors in Shell Canada believe the company is worth more than the $45 a share being offered by Royal Dutch because of “hidden gems” within the company

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Existing assets

Current daily oil and gas production, third quarter of 2006

Natural gas: 429 million cubic feet

Gas liquids: 25,900 barrels

Bitumen/oil sands: 111,900 barrels

Total: 209,300 barrels a day

Future assets

Oil sands: $12.8-billion of work is planned to expand the existing Athabasca Oil Sands Project and Shell wants to increase its output in the Peace River region by about 10 times to 100,000 barrels a day.

Offshore east coast: Shell is a minority partner in the highly prospective Orphan Basin area near Newfoundland.

Mackenzie Delta: Shell controls a major gas field with about 1 trillion cubic feet, which would be connected to southern Canada by a proposed pipeline.

Offshore west coast: Shell has stakes near the queen Charlotte Islands but development is at least a decade away.

Profits, third quarter

Exploration and production: $119-million

Oil sands: $262-million

Oil products (gasoline, etc): $201-million.

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