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Idemitsu Kosan and Showa Shell Sekiyu to merge on April 1, 2019

Idemitsu Kosan and Showa Shell Sekiyu announced yesterday that they have agreed to merge effective April 1, 2019.

“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 Kosan 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.

Idemitsu Kosan Chairman Takashi Tsukioka said well-known activist investor, Yoshiaki Murakami, helped persuade a majority of the founding Idemitsu family, which owns just a little over 28% of the company, to support the agreement despite their initial stiff opposition to the merger with Showa Shell.

Thus, the two companies held boards of directors meetings yesterday 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 share swap ratio will be set in October 2018, followed by extraordinary shareholders’ meetings in December 2018 to get shareholders’ approval. Showa Shell Sekiyu shares will then be delisted on March 29, 2019. The share swap will be conducted for the 68.75% of Showa Shell shares that Idemitsu Kosan does not currently own.

The combined company, which will bear the tradename Idemitsu Showa Shell, would account for about 30% of Japan’s domestic gasoline sales, second only to JXTG Holdings, which controls about half of the Japanese market.

As part of the agreement, the Idemitsu family will be able to nominate two of the eight initial directors of the combined entity.

As of Monday’s close, Idemitsu Kosan had a market capitalisation of JPY 792.5 billion (USD 7.1 billion) while Showa Shell had a market capitalisation of JPY 578 billion (USD 5.2 billion).

Synergies from the alliance are anticipated to be JPY 25 billion (USD 225 million) in three years. The two companies will target a net profit of at least JPY 500 billion (USD 4.5 billion) for the total of three business years from 2019, and plan a shareholder payout ratio of 50%.