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Idemitsu-Showa Shell to seek Asia expansion after April merger

With lengthy feud settled, the new company will chase growth overseas

Idemitsu runs thousands of service stations across Japan, such as this one.

TOKYO -- Japanese oil majors Idemitsu Kosan and Showa Shell Sekiyu will launch their newly merged company next April, with a goal of expanding to the Asian market.

Armed by an anticipated 50 billion yen ($454 million) worth of synergies annually over five years, the merged company will expand on Idemitsu's existing ventures in Vietnam and aim to enter new markets, as demand for gasoline ebbs in its home market of Japan.

A truce reached by Idemitsu's management and the founding family ends nearly two years of squabbles and court battles. The new entity will control 30% of the Japanese gasoline market.

Concessions to the family include a promise by both companies to uphold the principles of founder Sazo Idemitsu -- known for his reluctance to lay off staff even during economic downturns -- and reserving two seats on the board of the combined entity for his descendants. One of those directors will be Masakazu Idemitsu, the eldest son of Chairman Emeritus Shosuke Idemitsu, the current patriarch.

Regarding the development, Idemitsu issued a statement on Wednesday saying it has resumed "discussions with our major shareholders." Showa Shell confirmed that discussions toward a merger are underway.

The Japanese market welcomed the reconciliation on Wednesday. Idemitsu shares briefly surged by the daily limit of 20% before closing 475 yen higher at 3,980 yen. Showa Shell finished 10% higher at 1,728 yen, at one point touching a 19% gain.

Idemitsu's Chairman Emeritus Shosuke Idemitsu, son of the founder, is seen visiting a shrine in Fukuoka Prefecture last year. (Photo by Masaru Shioyama)

Idemitsu and Showa Shell first announced merger plans in July 2015, but the Idemitsu family staged a surprise revolt against the integration in June 2016, citing differences in corporate cultures and business strategies.

Founded by Sazo Idemitsu in 1911, the company has long been known for a rare management style that treats employees as family members rather than staff. Until recently, it was one of the very few Japanese corporations not to have a forced retirement age. The company had no time card, under the principle that employees were trusted to come to work and stay until their tasks were done.

The Idemitsu family feared that a merger with Showa Shell, a subsidiary of the Royal Dutch Shell group, would alter the company's venerable traditions. With a combined 33.92% stake, the family held veto power over the merger.

Unable to sway the heirs through talks, the Idemitsu board decided last July to issue roughly 120 billion yen ($1.1 billion) in additional shares, equivalent to 30% of the entire circulation.

Idemitsu founder Sazo Idemitsu

The family cried foul over what it saw as a blatant attempt by the company to dilute its ownership. The clan sought an injunction against the share issuance but was rejected by the Tokyo District Court. The family suffered another blow when an appeal was also dismissed by the Tokyo High Court.

The founding family's stake now dropped to roughly 26%, removing its veto power. Market participants look back at this as the turning point in the battle.

Despite the tide turning against him, Shosuke Idemitsu decided to continue with his fight against the board by purchasing an additional 2% stake. That was not easy since he had to put up his 11 million shares as collateral to borrow roughly $190 million worth of capital to finance the transaction.

Around this time, activist investor Yoshiaki Murakami approached the Idemitsu heirs, offering to lend part of the money toward that end. This granted him access to the family, and he suggested to them that it would be more beneficial to enter negotiations to extract better conditions than to be kept out of the loop of the Idemitsu-Showa talks.

Already past 90 years of age, Shosuke Idemitsu listened to the investor with keen interest. Rather than prolong a battle with no end in sight, he decided, it would make better sense to secure a seat on the board for his son, and to have the family continue to have a say in the company's future.

The final push came from the emergence of international investors. It became known that Hong Kong-based Oasis Management had acquired Idemitsu shares and was pushing the company to mount a takeover bid on Showa Shell.

Such a takeover would have entailed a premium of 20% to 30% on Showa Shell's share prices, a financial burden to Idemitsu. That would have pushed down Idemitsu's stocks, costing the family dearly. The prospect of the heirs' stake being diluted yet again also loomed.

Shosuke Idemitsu made a new proposal that his son be installed on the board, which Idemitsu's management was prepared to accept. The compromise made it possible for the stalled negotiations to move again.

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