TonenGeneral to Buy Exxon’s Japanese Unit for $3.9 Billion

TonenGeneral Sekiyu KK (5012) agreed to buy partner Exxon Mobil Corp. (XOM)’s Japanese business in a $3.9 billion deal that may force the oil refiner to seek new alliances.

TonenGeneral will acquire 99 percent of Exxon Mobil Yugen Kaisha, which produces and sells fuels, for 302 billion yen ($3.9 billion) using cash and bank loans, the Tokyo-based company said yesterday.

Refiners in Japan are grappling with rising operating costs after a 2010 order from the government to upgrade their oldest plants to extract more fuel from crude. While Japan’s consumption is declining due to a shrinking population and greater use of hybrid and electric autos, the transaction also reflects Exxon Mobil Chief Executive Officer Rex Tillerson’s strategy of focusing on oil exploration.

“TonenGeneral will struggle to recover their acquisition costs unless they find a strategic partner,” said Osamu Fujisawa, an independent energy economist in Tokyo. “There are no Japanese refiners that can partner with Tonen. So, it should be someone from the Middle East.”

Saudi Arabia’s state oil company, the source of almost 31 percent of Japan’s crude imports during the first nine months of 2011, owns a 15 percent stake in domestic refiner Showa Shell Sekiyu KK. (5002) The Abu Dhabi government owns a 21 percent stake in Japanese refiner Cosmo Oil Co. (5007)

TonenGeneral Managing Director Jun Muto said at a briefing in Tokyo today the company isn’t planning to sell a stake in the revamped company. “We don’t have any plan to cooperate with a company in the Middle East,” he said.

Shares Fall

TonenGeneral fell 2 percent to 733 yen at the close in Tokyo. Exxon dropped 0.4 percent to $85.49 at the close in New York.

The deal, which Exxon called a “restructuring” of its Japan business into a single asset, doesn’t involve the U.S. company’s liquefied natural gas marketing and sales or its specialty chemicals operations in the country. Exxon will continue to assist TonenGeneral with crude oil and products acquisition, both companies said.

TonenGeneral will be left with 200 billion yen to 300 billion yen in net debt after the transaction, which is expected to close in June, Muto said.

The company had 100 billion yen in cash at the end of 2011, according to a presentation on its website, and its market value was $5.5 billion as of Jan. 27.

Stake Reduced

For Exxon, the world’s largest energy company, the transaction is the biggest divestiture since the 1999 deal with Mobil Corp. that created the company. Exxon will see its stake in TonenGeneral decline to 22 percent from 50 percent and the Japanese refiner will retain exclusive rights to use its brands, according to statements by the two companies.

“Reducing exposure to refining makes sense in places like Japan, where demand isn’t growing,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, who has a “hold” rating on Exxon Mobil.

“In more mature economies like Japan, the U.S. and Europe, you are seeing demand for gasoline declining,” he said. “Most companies are at least reviewing their position in Japan.”

Japan’s fuel market changed in 2010 with a government directive to promote increased gasoline and gasoil production from residue, a low-grade byproduct of the refining process. Residue-processing facilities such as coker units cost about 100 billion yen to build, according to Credit Suisse Group AG.

The government order didn’t play a role in Exxon’s planning and TonenGeneral has no immediate plans to reduce production, Muto said. “The appropriate level of capacity is something we’re going to have to study going forward,” he said.

TonenGeneral also maintained its dividend forecast of 38 yen per share for 2011 and said that it intends to repeat it this year. In November, the company forecast full-year net income of 133 billion yen. It hasn’t yet announced earnings.

To contact the reporters on this story: Yuji Okada in Tokyo at yokada6@bloomberg.net; Jacob Adelman in Tokyo at jadelman1@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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