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Japanese refiner Idemitsu wins family backing for Showa Shell merger

Reuters, Kyodo

Oil refiners Idemitsu Kosan Co. and Showa Shell Sekiyu K.K. said Tuesday they have agreed to merge April 1, after Idemitsu’s founding family dropped its long-standing opposition to the plan.

The refiners will merge via a share swap, and Showa Shell will be delisted March 29, they said in a statement, pushing the shares of the two companies up sharply in afternoon trading.

The combined firm would account for about 30 percent of gasoline sales in Japan, second only to JXTG Holdings, which controls about half the market.

Idemitsu, the country’s No. 2 oil refiner by sales, has long been keen to merge its operations with fourth-ranked Showa Shell in response to shrinking gasoline demand.

But it was locked in a battle for about two years with the Idemitsu founding family, which owns just over 28 percent of the company and had argued the two firms were too different for any merger to work.

As part of the deal announced Tuesday, the founding family will be able to nominate two of the eight initial directors of the merged entity.

The share swap ratio will be set in October, followed by extraordinary shareholders’ meetings in December to seek approval.

The swap will be conducted for the 68.75 percent of Showa Shell shares that Idemitsu does not own. As of Monday’s close, Idemitsu had a market capitalization of ¥792.5 billion and Showa a market capitalization of ¥578 billion.

Investors welcomed the deal, pushing up shares in Idemitsu by as much as 17.8 percent on the Tokyo Stock Exchange, while Showa Shell jumped as much as 13.7 percent.

“We were able to reach a solid agreement,” Takashi Tsukioka, chairman of Idemitsu, said at a news conference, adding he hopes to see both companies move forward together.

The deal ends a long-time feud between the founding family and the company, after Masakazu Idemitsu, grandson of founder Sazo Idemitsu, agreed to the merger after listening to the advice of well-known activist investor Yoshiaki Murakami.

“We will join the board and make efforts to help turn the company into a better one,” the founding family said.

Along with the merger, Idemitsu said it would buy back up to ¥55 billion of its own shares through December to return profits to current shareholders before the merger.

Showa Shell Chief Executive Tsuyoshi Kameoka said 15 percent shareholder Saudi Aramco was “very supportive” of the merger.

Kameoka ruled out any closures of the combined company’s seven refineries in Japan, although a sector analyst said he hoped one refinery would close within five years given declining domestic demand. He declined to be identified as he was not authorized to speak with media.

The two firms will target net profit of at least ¥500 billion for the total of three business years from 2019, and plan a payout ratio of 50 percent.

The merged firm will use Idemitsu Kosan Co. as a company name but will conduct business under the trade name Idemitsu Showa Shell.

Idemitsu has long been known for its rare management style that treats employees as family members rather than staff.