Financial Times: Shell far too big a bite for predators
James Boxell Sheila McNulty
FT.com site; Jun 17, 2004
Posted 18 June 2004
While the proposed removal of Royal Dutch's priority shares opens the door to a takeover of the Anglo-Dutch parent company in theory, transforming this into a reality is extremely unlikely, according to industry analysts and investors.
Two European energy groups have run the rule over Royal Dutch/Shell, but both concluded it was too much to take on.
Jon Rigby, analyst at Commerzbank, says he "wouldn't have thought it even registers as a likely threat, the shares are back at the levels they were before January [when the overbooking of proved reserves was first revealed]".
Bruce Lanni, senior analyst at AG Edwards & Sons, says: "Due to the size of the combined entity, it precludes any major oil company from taking them over."
"Who, truly, could go after a company of that size?" He notes that Shell has a combined market capitalisation of about $200bn (£119bn).
The only companies with the scale to pursue Shell would be ExxonMobil or BP, but both would face enormous antitrust pressures, with one analyst saying the "regulatory issues are not even worth thinking about".
Total, the smaller and more nimble French group, has also been mentioned although many analysts think it would also face problems - and was unlikely to be interested.
Mr Rigby says: "Total is the largest refiner and marketer in Europe and Shell is the second biggest. It would need to sell one or the other."
Another analyst says he would be surprised if Total - "which has a very big mergers and acquisitions department" - had not taken a look at some stage, and that "some Shell shareholders might even like the thought of Total".
But he feels Shell will have moved a little bit beyond the French group's price range following its share price recovery.
JJ Traynor, of Deutsche Bank, also does not not see a buyer for Shell, but warns that the group needs to get rid of its non-core and underperforming assets and concentrate on seeking out opportunities in key oil producing regions such as Russia.
"If you look at the state Shell's in now, much is due to the fact that it lost a lot of competitive ground over the past five years because all the others merged."
BP bought Amoco and Arco, Chevron bought Texaco, Exxon bought Mobil and Total merged with Elf and Fina.
Mr Traynor says Shell runs the risk that it will miss out on another round of acquisitions, which will most likely take place in Russia.
He questions the strategic alignment from Shell's 34 per cent stake in Australia's Woodside Petroleum, and several analysts also query its US chemicals business.
"They have assets and regions that are non-core such as Syria, Gabon and Pakistan, but are underweight in some growth regions," Mr Traynor says. "There's not enough critical mass in China."
Jim Steenhagen, managing director at PFC Energy, agrees that when companies are undergoing large structural changes there is often a period in which little else gets done. "You don't want this to be a year and a half distraction in which other important decisions do not get made at Shell. They need to stay on the forefront of identifying new growth areas and make sure they don't get left behind in the former Soviet Union and the Middle East."
Unfounded rumours within the Royal Dutch/Shell network suggest the company has put to work a team of its own to assess the potential for a break-up of some sort. But analysts also believe a break-up is unlikely. One says: "I don't think companies tend to do that. What would you achieve?"
However, some analysts raise the possibility that the removal of the Dutch priority shares could open the way to a speculative takeover approach, where a hostile bidder could buy just the Dutch company for a much cheaper price and then force a break-up of the group.
"You could buy the cheaper one," one analyst says, "which is Royal Dutch at the moment, and try to force the other one to give up."
"This could be an interesting point," another says, "but a lot depends on how the original merger was put together in 1907."
Given the scale of the company, a meaningful valuation of Shell that goes beyond a rating comparison with its peers (it trades at a big discount to BP and Exxon) would require substantial resources.
Mr Rigby at Commerzbank says it is extremely difficult to put a sum of the parts valuation on its upstream businesses - which include oil and natural gas exploration and production activities. "There is no field-by-field analysis for the whole of upstream and you cannot disaggregate all of the assets," he says - and returns to the argument that a break-up or sale is a non-issue. "The real issue is, are they putting in place a structure that allows it to be run better?"
Mr Lanni of AG Edwards comments: "The best-case scenario for the company would be for the two entities to be combined into one."