This 89-Year-Old Scion’s Defiance Threatens a $1.7 Billion Merger

Shosuke Idemitsu

Shosuke Idemitsu. Photographer: Kyodo News

  • Idemitsu Kosan and Showa Shell had proposed ‘merger of equals’
  • Japan has encouraged refiners to consolidate as demand falls

In Japan’s carefully-choreographed, corporate world, public power struggles are generally frowned upon. Shosuke Idemitsu, 89, apparently doesn’t roll that way.

At an Idemitsu Kosan Co. shareholder meeting in June, investors were expected to vote in favor of reappointing directors who are supporting the government-backed, $1.7 billion merger with rival Showa Shell Sekiyu K.K. that’s scheduled to close by April of 2017.

Instead, a lawyer for Idemitsu, the scion of the company’s founding family that controls 33.9 percent of the refiner, stunned onlookers by announcing the family’s opposition to the deal. That came as a surprise to the company’s management, led by President Takashi Tsukioka, which said the octogenarian had earlier consented to the merger. Showa Shell shares immediately plunged 10 percent after the news was reported, the most in more than five years.

The deal may now be in jeopardy. Neither the family nor the company are talking to each other, according to lawyers for both. On Sept. 7, Idemitsu Kosan said it’s delaying the purchase of Showa Shell shares from this month to October or November due to an ongoing merger review by the Japan Fair Trade Commission. The company said it still plans to hold an extraordinary shareholder meeting to seek approval by year end.

There are two competing explanations about what happened. The Idemitsu family, for its part, has justified its opposition citing a potential clash in corporate cultures and even geopolitical complications. Showa Shell is 14.96 percent owned by Saudi Arabian Oil Co., while Idemitsu Kosan has long had business ties to Iran.

“We shouldn’t rush to merge with Showa Shell, which is under direct control of Saudi Arabia and state-owned Saudi Arabian Oil Co. while confusion centering around a conflict between Saudi Arabia and Iran becomes more serious,” the family said in a statement. The family thought it’d be the last chance to show their opposition to the merger after the company didn’t take seriously concerns they expressed in a letter and talks with the management, Takujiro Hamada, the family’s lawyer said in an interview June 30.

Power Struggle

Others see the familiar tale of a founding family unable to relinquish control. On Aug. 15, Idemitsu Kosan distributed a statement that outlines a Dec. 17 letter from the family highlighting their concerns about the dilution of its stake and loss of veto power allowed under Japanese law if the deal goes through. 

“We will seek to hold discussions with the founding family to get their understanding of the merger. By refusing to hold talks, the founding family is damaging not only shared interests of all stakeholders but also their interests,” Idemitsu Kosan Executive Vice President Daisuke Seki told reporters Aug. 15. “As a major shareholder, we hope the family will act calmly.”

Shosuke Idemitsu’s lawyer Hamada denies the company claim that his client approved the merger in July 2015. Hamada declined to make Shosuke available for an interview.

Corporate Culture

“The Idemitsu family is afraid the merger would weaken the corporate culture,” Minoru Shimamoto, a professor at Hitotsubashi University, who has written a case study about the company, said by e-mail. “The principle of ‘independence and empowerment’ is important. And it is one of the reasons they refuse the merger.”

The restructuring of Japan’s refiners will increase their competitiveness, Saudi Arabia Energy Minister Khalid Al-Falih told the Nikkei newspaper this month, without directly commenting on Idemitsu. Saudi Aramco will continue to hold shares in the new entity after the merger, he said.

Idemitsu shares have fallen 15.9 percent since the family expressed their opposition to the merger on June 28, the biggest decliner among the 11-member Topix Oil & Coal Index. The stake controlled by the family has shrunk in value by 19.6 billion yen to 105 billion yen. The deal would dilute the family’s stake and they would likely lose veto power, said Hidetoshi Shioda, an analyst at SMBC Nikko Securities Inc.

Idemitsu shares fell 0.3 percent to close at 1,936 yen in Tokyo. Showa Shell rose 1.1 percent to settle at 898 yen. The benchmark Topix index lost 0.2 percent.

‘Pirate’

The Idemitsu family has a long history of defying governments, ratings agencies and rivals.

Sazo Idemitsu, who founded the company in 1911 and died in 1981, was known by the nickname “Pirate,” which he earned early in his career for selling fishermen fuel oil by sea, according to a TV special on his life. He was also known for his devotion to his workers, whom he considered members of an extended family, according to the company’s website. After World War II, the company lost almost all of its overseas businesses because they were in territories annexed by Japan, yet avoided cutting employees by expanding into radio repair and soy sauce sales to meet debt obligations.

The family isn’t just fighting against two oil refiners -- they have positioned themselves against the Japanese government’s desire to consolidate the sector. Hiroshige Seko, Japan’s new Economy, Trade and Industry Minister, expects the merger to go through because the country’s refining industry must reduce capacity to stay competitive amid declining domestic fuel demand.

Refining Deal

Tokyo-based refiners JX Holdings Inc. and TonenGeneral Sekiyu KK last month finalized an agreement to form the county’s biggest oil refiner. The combined company will control about half of Japan’s gasoline market when the deal is complete in April.

“I expect Idemitsu and Showa Shell’s management will come to an understanding with the founding family and they will make progress toward the merger,” Seko said Aug. 4.

It isn’t the first time the company has been at odds with authorities. In the early 1950s after Iran nationalized oil fields controlled by Anglo Iranian Oil Co., now BP Plc, Idemitsu sent a tanker to the Persian Gulf country to procure gasoline and diesel oil despite British-led sanctions. The U.K. took the Japanese company to court but eventually withdrew the case, according to Idemitsu’s website.

Idemitu’s gambit has become legend in Japan, spawning a best selling novel and an upcoming movie.

Ratings Downgrade

Under the terms of the announced July 2015 agreement, Idemitsu agreed to purchase a 33.24 percent stake in Showa Shell from Royal Dutch Shell Plc for 169 billion yen and the Japan refiners have said they would work toward a “merger of equals.”

Shosuke’s reemergence in June to challenge the company’s decision to merge with Showa Shell is in line with Idemitsu’s culture. In 1998, Idemitsu’s accounting director, Tetsuo Iseki, argued to Moody’s Investors Service it didn’t properly weigh the company’s founding principles after it downgraded the company.

Undeterred by the family’s tactics, Idemitsu Kosan’s management said in a statement in June that it remained confident integration with Showa Shell is the “best path forward” and that it will continue to hold discussions on the merger. Showa Shell said it planned to continue talks with Idemitsu.

No Escape

That hasn’t phased Shosuke Idemitsu. He bought 400,000 shares of Showa Shell in another bid to derail the merger, his lawyers said in August. The purchase meant with the addition of the founding family’s shares Idemitsu Kosan would hold more than one-third of the company, which under Japanese securities law would require Idemitsu Kosan to do a tender offer for shares, according to a statement from the family’s lawyers. 

Idemitsu has countered by saying it may reduce the shares in Showa Shell it buys from Royal Dutch Shell to avoid launching a tender offer, a spokesman said last month. If Idemitsu is forced to launch a tender offer it may become more expensive than the deal to buy Royal Dutch Shell’s stake.

Idemitsu said in June it plans to complete the transaction by the end of September, then agree on the exact details of the merger. After that, Idemitsu must seek approval for the merger during an extraordinary shareholder meeting, where the Idemitsu family would likely use their veto power.

Even if the family the can block the merger, falling demand for gasoline and other refined products in Japan may ultimately dictate the company’s fate.

“To survive in the global refining market amid declining domestic demand Japanese refiners can’t escape restructuring,” Minister Seko said Aug. 4.

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