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Japan's Idemitsu family to accept merger with rival refiner Showa Shell

Decision clears last obstacle to forming nation's No 2 oil company

Showa Shell and Idemitsu expect the merger to help them accelerate growth in markets such as Southeast Asia.

TOKYO -- The founding family of Japanese oil company Idemitsu Kosan has signaled it will drop its opposition to long-stalled plans for a merger with rival Showa Shell Sekiyu, clearing the way for the two to combine next spring.

The family, which holds 28% of Idemitsu's shares, laid out conditions for its support in behind-the-scenes talks with management. Its demands included a pledge to uphold the principles espoused by founder Sazo Idemitsu, along with two board seats reserved for family members at the merged company. Idemitsu agreed to bring on the eldest son of Chairman Emeritus Shosuke Idemitsu as a director.

The boards of Idemitsu and Showa Shell are to meet on mid-July to make a final decision on the merger. The transaction would then be put to shareholders for approval at extraordinary meetings within the year. The companies have been taking steps toward integrating even with the merger on hold.

The two plan to combine through a stock swap. The merged entity will maintain leaders from both companies in key roles, including Chairman Takashi Tsukioka and CEO Shunichi Kito from Idemitsu and President and CEO Tsuyoshi Kameoka from Showa Shell.

The merger would bring a period of consolidation in Japan's oil industry into its final stages. JX Holdings and TonenGeneral Sekiyu came together in April 2017 to create JXTG Holdings, which controls more than 50% of the domestic gasoline market. Since Idemitsu and Showa Shell hold more than 30% between them, their union would leave the industry with just two major players.

The consolidation comes amid a decline in gasoline consumption of 2% to 3% a year as Japan's population ages and greener cars gain ground. Gas stations, which have fallen by more than half from the peak to just 31,000 nationwide, are locked in price wars. Though the competitive environment has eased somewhat, vehicles powered by electric motors and alternative fuels are expected to erode demand further.

Idemitsu and Showa Shell aim to use the merger to pivot toward growth by stepping up expansion into markets such as Southeast Asia, while bringing in a steady profit stream from domestic operations. Idemitsu is already moving in this direction, setting up refinery and gas station businesses in Vietnam. "We hope to use the increase in scale from integrating with Showa Shell to accelerate our business development," an Idemitsu executive said.

The two companies anticipate 50 billion yen ($454 million) worth of synergies annually in five years.

Idemitsu's founding family had proved a formidable obstacle to the merger. It had initially been expected to support the deal when it was first announced in July 2015, but it registered its opposition at a general shareholders meeting in June 2016. Tsukioka, who was president at the time, tried to negotiate but failed to reach a compromise.

The company issued new shares in July 2017, diluting the Idemitsu family's interest to around 26% from 33.92%. The family boosted its stake by 2 percentage points that December. But Shosuke Idemitsu showed greater interest in a rapprochement this year, enabling the two sides to reach an accord.

"For Idemitsu, this was caused by a lack of dialogue with the major shareholder," a management consultant said, adding that the failure to seal the deal for nearly three years "must be taken to heart."

At the same time, the founding family "must contain its emotions and be conscious of its responsibility for the growth of the new company as a major shareholder," the consultant said.

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