Idemitsu Kosan Co., the nation’s second-largest oil distributor, is considering acquiring fifth-ranked Showa Shell Sekiyu K.K. through a tender offer, sources familiar with the move said Saturday.
The deal, which could trigger a broader industry realignment being urged by the government, would create a player with around ¥8 trillion (some $67 billion) in consolidated sales, trailing industry leader JX Holdings Inc., which logged about ¥12.4 trillion.
It will be the largest industry reorganization since JX was created in 2010 by integrating Nippon Oil Corp. and Nippon Mining Holdings Inc.
“We are negotiating with various companies for a possible realignment,” Idemitsu President Takashi Tsukioka told reporters, adding that no decision has been made.
The envisioned acquisition, which Idemitsu is apparently exploring with the involvement of lenders, could spur other oil distributors to make similar moves, with analysts focusing attention on Cosmo Oil Co., which ranks third, and TonenGeneral Sekiyu K.K. in fourth, as well as from JX Holdings.
Showa Shell, about 35 percent owned by Anglo-Dutch oil giant Royal Dutch Shell PLC, was valued at about ¥380 billion at Friday’s market close.
The plan comes at a time when a fall in domestic oil demand seems almost unstoppable as more businesses and consumers embrace energy conservation efforts and fuel-efficient vehicles. The tough environment has forced the oil industry to devise ways to reduce its refining capacity.
The government is expected to support the possible deal between Idemitsu and Showa Shell as the Ministry of Economy, Trade and Industry has encouraged domestic oil distributors to realign the industry to raise their cost efficiency and improve international competitiveness.
Idemitsu and Showa Shell have a total of six refineries under their wings. Reorganizing the plants could also be on the agenda as Idemitsu considers buying its competitor.
Domestic demand for oil products, such as gasoline and other fuel oil, stood at 197.5 million kiloliters in the business year ended in March 2013, some 20 percent below its peak of 245.97 million kl marked 13 years earlier. One barrel equals 0.159 kl.
The government projects the downward trend to continue.
The ministry has long instructed large distributors to address its oversupply of oil products, but reaction to the advice has only been lukewarm. So in July, the ministry decided to bear down on the oil industry by requiring each distributor to cut refinery capacity by 10 percent by March 2017.
Idemitsu, whose predecessor was established in 1911, is based in Tokyo. Unlisted until 2006, the oil company employs over 8,700 people and posted a group net profit of ¥36.2 billion on sales of ¥5.03 trillion for the business year ended March 31.
Showa Shell, created in 1985 through a merger of two predecessors, has more than 5,800 workers. Royal Dutch Shell is the biggest stakeholder in the Tokyo-based company, which logged a group net profit of ¥60.2 billion on sales of ¥2.95 trillion for 2013.