Idemitsu Kosan Co. and Showa Shell Sekiyu K.K. have agreed to merge on an equal footing, they said Thursday, in a move that could trigger realignment in Japan’s highly competitive refinery industry.
The second- and fifth-largest Japanese oil distributors, which had announced plans for a merger in July, will integrate their businesses starting between next October and April 2017.
Idemitsu Kosan Co. signed a nonbinding agreement to merge with Showa Shell Sekiyu K.K., almost four months after buying a third of its rival Japanese refining company.
The combined company will have some ¥8 trillion ($65 billion) in sales, still behind industry leader JX Holdings Inc. They will equally share the seats on the new company’s board.
The move comes amid difficulties for refiners, with carmakers developing vehicles that consume less or no gasoline. Falling oil prices have also weighed on their earnings.
While Idemitsu and Showa Shell will use their respective brands for the time being, they plan to introduce a new one for gas stations in the future.
By streamlining logistics operations and other means, the two companies are aiming for annual earnings improvement of ¥50 billion in five years after the merger.
The oil distributors will not cut their payrolls and will maintain a total of six refineries in Japan.
“The current market conditions are severe in Japan,” Susumu Nibuya, director at Idemitsu, said during a briefing Thursday. “As one company, our natural synergies will help us cut costs and increase the value of our products in a way we couldn’t if we were two.” A value for the transaction was not provided.
Japan’s oil market is in a prolonged period of oversupply that endangers businesses from refiners to distributors and domestic demand is expected to decline further, according to Thursday’s exchange filing by the companies.
Hiroshi Watanabe, an executive officer at Showa Shell, said at the news conference that the two companies will not integrate their facilities as “each refinery has a high level of competitiveness and their locations are not overlapping.”
Idemitsu agreed in July to purchase a 33.24 percent stake in its rival from Royal Dutch Shell Plc for ¥169 billion ($1.4 billion). At that price, the entirety of Showa Shell would be valued at about $4.1 billion.
A full combination of the two would create a company with about a third of the domestic gasoline market and would follow agreements between Japan processors to consolidate some plants as they struggle with lower fuel demand. JX Holdings, the country’s biggest refiner, cut its full-year net income target by 72 percent to ¥450 billion this month, citing inventory losses and lower refining margins.
“Amid falling demand, a decline in refining capacity or a number of players will have a positive impact on prices and margins,” Shogo Tono, a Tokyo-based senior credit analyst at Mizuho Securities Co., said. “It’s credit positive for the entire industry if oligopoly helps them secure stable margins.”
Oil demand in Japan has been declining as the nation’s population shrinks and as a shift to more energy-efficient cars prompts refiners to lower output. The government, a backer of industry consolidation, has asked for cuts in processing capacity as the U.S. boosts exports and China floods Asian markets with its surplus supply.
TonenGeneral Sekiyu K.K. agreed last December to link its Chiba refinery with Cosmo Oil Co.’s neighboring plant to increase production efficiency. And Cosmo Oil has held talks with companies on possible partnerships for its Sakai and Yokkaichi refineries, President Keizo Morikawa told reporters in May.
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