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Idemitsu, Showa Shell Fall as Merger at Risk Amid Opposition

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By Tsuyoshi Inajima: Emi Urabe and Stephen Stapczynski: June 29. 2016

  • Idemitsu founding family opposes merger with Showa Shell

  • Family owns 33.9% stake in Japan refiner Idemitsu: statement

Japanese refiners Idemitsu Kosan Co. and Showa Shell Sekiyu KK fell one day after descendants of Idemitsu’s founder said they oppose a merger between the two companies because of Showa Shell’s ties with Saudi Arabia.

Idemitsu in Tokyo fell as much as 10.4 percent to 2,063 yen as of 11:59 a.m. local time, the biggest intraday drop since March 2011. Showa Shell fell as much as 6.6 percent, extending a 10 percent decline on Tuesday after the family announced its opposition.

Idemitsu has maintained a close relationship with Iran and descendants of the company’s founder oppose a deal in part because of heightened tensions between Iran and Saudi Arabia, according to a statement from the Daiichi-Chuo Law Office, which is representing the family. The descendants own 33.9 percent of Idemitsu, which means they may be able to use veto power on the merger at a special shareholder meeting.

“We shouldn’t rush to merge with Showa Shell, which is under direct control of Saudi Arabia and state-owned Saudi Arabian Oil Co. while confusion centering around a conflict between Saudi Arabia and Iran becomes more serious,” according to the family’s statement.

Idemitsu denied a local report that it would issue new shares to counter the founding family, said a company spokesman, who asked not to be identified because of internal policy.

Profit Margins

Idemitsu and Showa Shell in November agreed to merge to create a company with about a third of the domestic gasoline market as a shrinking population and a shift to more energy-efficient cars cut fuel demand, which is forecast to decline 8.4 percent over the next five years.

“The business integration would be quite difficult if the founding family opposes it,” Syusaku Nishikawa, a Tokyo-based analyst at Daiwa Securities Co., said by e-mail.

In the absence of a merger, the two companies would be challenged to stabilize profit margins in the long term, Nishikawa said.

Idemitsu may need to sell at a loss the 33.3 percent stake in Showa Shell it agreed to buy from Royal Dutch Shell after it gets approval from Japan’s Fair Trade Commission, Hidetoshi Shioda, Tokyo-based analyst at SMBC Nikko Securities, said in note dated June 28.

Idemitsu said in a statement that it remains confident integration with Showa Shell is the “best path forward” and that it will continue to hold discussions on the merger. Showa Shell plans to continue talks with Idemitsu, said a company official, who asked not to be identified because of internal policy.

“Demand for refined-oil products is weak due to Japan’s slowing economic growth, aging population and improving fuel efficiency,” Lu Wang, a Bloomberg Intelligence analyst in Hong Kong, said by e-mail.“If the deal fails to complete, the refining industry in Japan would miss one opportunity to increase operational efficiency through consolidation.”

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