Japan’s Idemitsu faces merger hurdles

Japanese oil company Idemitsu Kosa has been forced to postpone the acquisition of a stake in a rival. It needs to clear a series of obstacles before the deal can go through.

Japan’s oil refining sector looks ripe for consolidation. But anti-trust fears and a backlash from one party's founding family are delaying a landmark merger in the sector.

Japanese oil company Idemitsu Kosan postponed its off-market offer for a 33.3% stake in Showa Shell Sekiu on Wednesday. It was planning to buy the entire stake, held by Royal Dutch Shell, this month but has now said the deal will not go ahead until October or November.

That may not appear a long delay, but is just the latest push back for a deal that has been rumored since 2014.

The delay is mainly down to the Japan Fair Trade Commission not finishing its review of the planned merger. The commission’s decision appears more difficult given the fact that it is considering another merger in the same sector at the same time: JX Holding and TonenGeneral Sekiyu also plan to merge.

Stronger together 

Japan’s oil refinery sector has faced severe challenges in recent years. The collapse in the price of oil, keen competition from international rivals, and declining domestic demand have all hurt the sector.

JX Holding, when detailing the rationale for its merger with TonenGeneral, told investors demand for petroleum products in Japan had fallen around 23% in 10 years.

It added that the two companies, after trying their best to cut costs and improve efficiencies on their own, were forced to acknowledge “the need for even more drastic rationalisation and efficiency improvement, which neither company would likely be able to achieve individually".

Facing the same problems — combined with the pending merger of two local rivals — it is little surprise Idemitsu Kosan is attempting a tie-up with Showa Shell. It has already signed a non-binding memorandum of understanding with the business, and plans a full merger in the future.

But it needs to overcome serious hurdles before that will happen.

Presuming both the JX/TonenGeneral and Idemitsu/Showa mergers go ahead, the two enlarged Japanese oil refiners will control more than 70% of market share in the country. The synergies may seem obvious. But so do the risks to competition.

Fair cop

Japan’s Fair Trade Commission said in January it was considering the deal, and asked Idemitsu to provide more details. It also gave third-parties the chance to comment on the merger through its website. Perhaps the responses were overwhelming — as it has still not made a decision.

A much more immediate threat to Idemitsu’s deal is the attempt by the company’s founding Idemitsu family to block the takeover. On June 28, Ideitsu released an announcement confirming that an agent of a “major shareholder” expressed objection to the business integration during the ordinary meeting of shareholders.

It is widely believed that a member of the founding family has bought a 0.1% stake in Showa Shell, someone at Idemitsu acknowledged. But he said he could not be sure whether the family had bought even more since — or had even sold down the stake.

The 0.1% purchase could be a crucial roadblock, since it threatens to derail the off-market sale. Japanese securities laws limit a company from owning more than third of another company — and state that if an acquiring company wants to go over that, it needs to launch a tender offer.

Idemitsu plans to hold an extraordinary meeting of shareholders by the end of this year. Although it has pushed back the offer for the shares, the projected completion date of the merger remains the same at April 1, 2017.

JX Holding and TonenGeneral Sekiyu finalised the merger ratio terms last week in the expectation of business integration taking effect on April 2017. It is still subject to approval at the general meetings of shareholders of both companies and the approval of the relevant governmental authorities. JX will swap 2.55 of its shares for each share of TonenGeneral.

JPMorgan is the financial advisor for Idemitsu Kosan. Daiwa Secutities and Lazard are the financial advisor for Showa Shell Sekiyu.

Additional reporting by Matthew Thomas.

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