Scotland on Sunday: Chaos looms as Shell's halves unite at last: “SHELL runs the risk of spreading chaos through the market this week via its efforts to clean up its reputation.” Sunday 26 June 2005
IN THE CITY
IAIN DEY
SHELL runs the risk of spreading chaos through the market this week via its efforts to clean up its reputation.
The oil giant is to seek shareholder approval for the overhaul of its complicated corporate structure that was demanded in the wake of last year's reserves reporting scandal.
At separate meetings in London and Amsterdam on Tuesday morning shareholders will vote on the plans to unify the company's Dutch and British halves into one organisation - which are likely to be approved by an overwhelming majority of shareholders.
Assuming the deal goes through, Shell will be headquartered in The Hague but listed in London. That means the 60% of the company listed on the Amsterdam exchange as Royal Dutch will suddenly subsume into Shell's FTSE listing.
Although the company will be exactly the same as before, Shell's market cap on the London market will jump from around £50bn to £120bn. It will account for 7.5% of the FTSE All Share index, as opposed to 3.4% - posing all kinds of problems for fund managers running index-linked funds.
While Shell flagged the situation several months ago many fund managers are barred from acting on the assumption that the vote will go through. The new shares won't start trading until July 20 but as soon as the vote is cleared some serious selling is likely to take place. Institutional investors running index-linked funds will need to start buying Shell shares to make up their tracking positions. The only way they can raise those funds is by selling other shares.
Finlay Macdonald on the UK equities desk at Britannic Asset Management described it as "the single most important thing to happen to the market since Vodafone's acquisition of Mannesman". He expects major blue chip stocks to suffer the most as institutions will be looking to trade the shares that are easiest to sell. The likes of Vodafone, GlaxoSmithkline and the major banks could all be hit by technical selling.
A number of investment banks have been devising complicated derivative products to help smooth the transition. Some market watchers believe the fears of the impact on the market have been over-cooked. But no one seems willing to quantify the impact on the market until ahead of the vote.
However, the impact of the deal on one group of UK shareholders has been quantified by the Association of Private Client Investment Managers. They believe that roughly 3,000 Britons hold the Dutch shares. These people face a collective capital gains tax bill of £80m as a result of the deal.
Despite all the efforts to reform Shell's remuneration policies, it is still facing some resistance. Voting agency PIRC is recommending that shareholders oppose a new long-term incentive plan. The ABI also has the Shell bonus scheme on an "amber" rating. Even if the City brokers are successful in limiting the impact of Shell's reforms on the market, oil stocks are going to be playing a major role in the markets over the next few days.
Crude prices touched $60 for a second consecutive day on Friday, casting a shadow over the prospects for world growth and sending the FTSE and the Dow Jones into retreat - but giving oil firms a nice boost.
Most of the attention has been focusing on mid cap explorers such as Dana Petroleum and Premier Oil and helped push the FTSE 250 to another record high earlier in the week.
The general mood also sparked rumours that BP may bid for Cairn Energy, though one respected oil analyst described it as "absolute nonsense".
But Finlay Thomson at Cairn's house broker ABN Amro insisted the theory has credence - even if nothing is likely to happen any time soon. BP, like all the majors, needs oil. While Cairn's projected reserves from the Mangala field amount to about five days of BP's global production, they could be interested in the exploration potential.
The other economic factor still swaying the market is consumer confidence. Speculation that interest rates could be cut as soon as August has caused the retail sector to rally at the end of last week.
Although little corporate news is scheduled for this week, most of what is due to be announced is once again from the retail sector.
HMV unveils its annual results on Tuesday and investors are worried that the music and books retailer is being badly hit by the consumer spending slowdown. But the recent release of albums by Coldplay and Oasis and the imminent arrival of the new Harry Potter novel in stores could provide a boost.
HMV revealed last month that like-for-like sales fell by 2.2% during the 14 weeks to April 30, although the picture was brighter for total sales, which rose 1.2% at constant exchange rates.
Wet weather during the first half of the year is likely to cast a small cloud over the interim results of Dobbies Garden Centres on Tuesday. The Edinburgh-based group is forecast to announce full-year pre-tax profits of about £5.35m against £4.7m.
http://scotlandonsunday.scotsman.com/business.cfm?id=702442005
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