Idemitsu, Showa Shell close in on merger

04 July 2018, Week 26, Issue 632

Japanese oil refiner Idemitsu Kosan has confirmed that it has resumed talks with its founding family over the long-delayed merger with smaller domestic peer Showa Shell Sekiyu, raising hopes for the creation of a new bigger refiner in the first half of 2019.

On June 27, Idemitsu said it was in talks with Showa Shell regarding a “business integration” and that it discussions with its major shareholders were ongoing. “However, no formal decision has been made. We will make a further announcement promptly upon the occurrence of any event required to be disclosed,” it added.

Idemitsu confirmed that the resumption of talks at its ordinary shareholder meeting in Tokyo on June 28, although it did not give any further details. CEO Shunichi Kito told the meeting that the company wanted to realise the merger “as soon as possible”.

Hearts and minds

Idemitsu’s June 27 statement came after a Nikkei report the same day stating that the founding family had dropped its objections to the merger and that a deal was expected in the spring of 2019.

The business daily also reported that Idemitsu would resubmit its merger proposal to Showa Shell in the near future and that the two companies would seek shareholder approvals at extraordinary meetings before the end of the year.

The financial daily added that Idemitsu’s founding family – led by 90-year-old chairman emeritus Shosuke Idemitsu – had agreed to the merger after Idemitsu’s management team accepted its demands. These included maintaining founder Sazo Idemitsu’s management philosophy and appointing two members of the founding family – including Shosuke’s eldest son, Masakazu Idemitsu – as board members of the combined company. Previous objections included the two companies’ different corporate cultures.

The family is also reportedly concerned that a merger would dilute its influence within the company. Japan’s biggest daily, the Yomiuri Shimbun, reported on June 29 that Shosuke’s second son, Shosuke Idemitsu, still opposed the merger on these grounds.

The Yomiuri Shimbun report said an investment fund involving Yoshiaki Murakami, a prominent Japanese activist investor living in Singapore, had acquired a minority stake in Idemitsu and had thrown its support behind the merger.

Idemitsu and Showa Shell reached a basic merger agreement in November 2015, but the plan has been delayed owing to objections from the Idemitsu family, which has a 28% stake in the company.

On April 1, Idemitsu’s executive vice president Shunichi Kito became new CEO and former CEO Takashi Tsukioka assumed the previously vacant post of chairman. Both have the right to represent Idemitsu.

Under the new management structure, Tsukioka has been in charge of pushing ahead with the merger plan by trying to persuade the founding family to accept it, while Kito has been responsible for day-to-day operations.

Idemitsu’s management is pushing the merger amid a general consolidation of the entire Japanese downstream.

Economies of scale

Japanese energy giant JX Holdings and TonenGeneral Sekiyu merged in April 2017, creating JXTG Holdings, which controls more than 50% of the domestic gasoline market. A combined Idemitsu and Showa Shell would control more than 30% of the domestic gasoline market.

The ongoing consolidation of the Japanese refining industry is being driven by declining domestic oil demand and overcapacity, which has intensified competition at home. Oil product demand has been declining since its peak in fiscal 1999. The Ministry of Economy, Trade and Industry (METI) estimates that demand will shrink at an average annual rate of 1.7% between fiscal 2016 and 2020.

While the merger will help the two firms secure domestic market share, Idemitsu and Showa Shell are also anticipated to expand overseas.

Idemitsu has already secured a presence in Vietnam’s downstream through the 200,000 bpd Nghi Son refinery and petrochemical complex in Thanh Hoa Province.

The project operator is Nghi Son Refinery and Petrochemical (NSRP), in which Idemitsu, Kuwait Petroleum International (KPI) state-owned PetroVietnam and Japan’s Mitsui Chemicals hold 35.1%, 35.1%, 25.1% and 4.7% respectively.

In April 2016, Idemitsu also established Idemitsu Q8 Petroleum as its 50:50 joint venture with KPI to engage in oil product wholesaling and retailing. In October 2017, Idemitsu Q8 Petroleum built and started operating a service station inside Hanoi’s Thang Long Industrial Park, which is home to numerous Japanese facilities. It is Vietnam’s first service station owned by a foreign company.

 

Edited by

Andrew Kemp

Editor

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