TOKYO -- The founding family of Idemitsu Kosan, Japan's second-largest oil distributor, voiced its opposition Tuesday to a planned merger with rival Showa Shell Sekiyu in a move that may have far-reaching implications for the country's energy sector.
A founding family representative voted against reappointing the company's 10 directors at its annual shareholders meeting. The directors all won majority support to remain in their posts.
The founding family claims to have a 33.92% stake in the refiner, spread across family business Nissho Kosan and the holdings of former Idemitsu President Shosuke Idemitsu, the late founder's son, and other entities -- enough to veto such special resolutions as a merger.
The family argues that Idemitsu and Showa Shell have significant differences in corporate culture and business strategy, and thus will not be able to realize synergies from the deal. It said, for example, that Idemitsu workers are not unionized while Showa Shell's are; and though Idemitsu has close ties to Iran, Showa Shell is partly owned by Saudi Aramco, the state oil company of Saudi Arabia.
Idemitsu agreed last July to purchase shares in Showa Shell, and the companies in November signed a memorandum of understanding for a merger. In addition to gaps in corporate culture and future plans, the founding family likely worried that the deal would dilute its shares in Idemitsu. Company officials had been speaking with the family since November, but were ultimately unable to win them over.
Since December, the Idemitsu family has sent out a steady stream of documents expressing its opposition to the merger. A decision was made to challenge the company's proposals at the shareholders meeting Tuesday after receiving no clear response.
The next step
Idemitsu had planned to purchase about 33% of Showa Shell's shares from Royal Dutch Shell as early as September. It aimed to then hold an extraordinary shareholders meeting by the end of this year and perform a stock-for-stock merger in April 2017.
It has several options to put the merger back on track. The first is to renegotiate with the founding family for their support, which would let Idemitsu take a big step forward with the deal. But it will be a challenge talking the family into accepting a smaller say in the company.
Idemitsu could also try to convince Showa Shell into accepting a tender offer. But the latter is strongly opposed to an acquisition, making this an unlikely scenario.
The last resort would be to issue new shares so the founding family has less than a one-third stake in the company. But this would irreparably damage Idemitsu's relations with the family and dilute the stock held by regular shareholders as well.
Other oil distributors are also eyeing mergers as Japan's petroleum market shrinks amid a declining population and widespread energy conservation efforts. JX Holdings and TonenGeneral Sekiyu plan to merge next April, and the Japan Fair Trade Commission is reviewing the deal on the assumption that Idemitsu and Showa Shell are also integrating.
Antitrust authorities are more concerned with maintaining a fair and balanced oil sector than with individual companies. They may not allow JX Holdings and TonenGeneral, which together hold over 50% of Japan's gasoline market, to merge if the Idemitsu-Showa Shell deal falls through.
There used to be more than 10 oil refiners in Japan. A 2010 merger that created JX Holdings brought the number down to the current five. But the industry still faces stiff headwinds, and likely will not be able to slash its capacity as the government demands without major restructuring.
Many Japanese businesses have run into trouble with founding families this year. Still, it is rare for a family to publicly oppose a company on the day of the annual shareholders meeting. The incident at Idemitsu will likely raise questions about companies' relations with shareholders.