Idemitsu Kosan, Japan’s No.2 oil refiner by sales, and fourth-ranked Showa Shell Sekiyu said last Tuesday they had agreed to merge on April 1, 2019, after Idemitsu’s founding family dropped its opposition to the plan. The two companies were locked in a battle for about two years with the Idemitsu founding family, which argued the two firms were too different for any merger to work. Idemitsu has long been known for its rare management style that treats employees as family members rather than staff.
The newly combined firm will account for about 30 percent of Japan’s domestic gasoline sales, second only to JXTG Holdings, which controls about 50 percent of the market.
The two companies held boards of directors meetings last Monday and executed the agreement to merge “as the best method of enhancing enterprise value,” through the execution of a share exchange agreement. Under the share exchange agreement, Idemitsu Kosan will distribute its shares to shareholders of Showa Shell and acquire all the issued shares of Showa Shell.
“The domestic oil industry faces structural challenges such as a medium to long-term decline in the demand for oil products, and overcapacity, which materially influences current and future management not only of the companies but also of dealers, distributors, transport companies, and cooperative companies that have been working alongside the Companies,” Idemitsu said in a statement. Considering that the business environment is becoming more challenging, the companies recognize that they urgently need to implement the business integration of the companies, it added.
As part of the agreement, 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.
The deal ends a long-time feud between the company and the founding family, which owns just over 28 percent of the company, after Masakazu Idemitsu, grandson of founder Sazo Idemitsu, agreed to the merger after listening to the advice of activist investor Yoshiaki Murakami.
Along with the merger, Idemitsu said it would buy back up to 55 billion yen of its own shares through December to return profits to current shareholders before the merger.
The two firms will target net profit of at least 500 billion yen for the total of three business years from 2019.
Talks of the acquisition date back to January 2015, when reports surfaced that Idemitsu was in the final stages of purchasing Showa Shell. Idemitsu denied these claims, but confirmed that the two companies were discussing potential cooperation.
As of last Monday’s close, Idemitsu had a market capitalization of 792.5 billion yen (USD 7.1 billion) and Showa Shell had a market capitalization of 578 billion yen (USD 5.2 billion).
After the merger, the new companies will be known as Idemitsu Kosan Co., however, it will conduct business under the trade name Idemitsu Showa Shell. Even after the integration, the refiners will continue to use their own names and brands.