Shell picks up pieces of shattered Energy deal

By GEOFF SENESCALL

It was 4:30 Thursday morning in Holland when New Zealand's competition watchdog declined to clear Royal Dutch Shell's $4.6 billion bid for Fletcher Energy.

Shell's executives in The Hague were fast asleep. But not for long. Minutes after the Commerce Commission rejected Shell's application to buy New Zealand's largest oil and gas producer at 4.30 pm (NZ time), their dreams were shattered by the sound of the telephone.

The call came from Shell's alarmed New Zealand advisers, whose seven-figure bonuses are on the line if the deal does not go through.

The flavour of the conversation is not hard to guess.

It would end up being a long night for Shell's corporate advisers in New Zealand, Ord Minnett, as they picked over the application and prepared for a meeting with the commission the following day.

The dismay was felt equally among Fletcher Challenge executives. Chief executive Mike Andrews heard about the decision at a Credit Suisse First Boston briefing on a proposed $427 million Fletcher Forests rights issue. Needless to say he made a swift exit.

His mood would have been markedly different from the ebullience he displayed on Tuesday, when Fletcher announced the long-awaited restructuring package for its three divisions. At the time, there had been a sense of elation at the Penrose head office where the company's top executives had gathered to unveil their plans.

The decision to dismantle the country's largest and best known conglomerate was not taken lightly. But in the end Fletcher Challenge had little choice, after years of poor performance had resulted in billions of dollars squandered.

Late last year the group embarked on a process to either sell its divisions or spin them off into standalone businesses. Under the restructuring plan Fletcher Challenge would cease to exist early in the new year.

It was the sale of Energy, the lynchpin of the restructuring plan, which the Fletcher executives appeared most excited about.

Fletcher chairman Roderick Deane described the offer from Shell and its Houston-based partner Apache as an "excellent one." Certainly the deal valued Energy shares at $11.22 each - a 43 per cent premium on their last trading price.

But the commission's move to put the kibosh on this crucial deal must have brought a sense of deja vu to Fletcher executives.

Nearly a year ago, a $4.6 billion deal to merge Fletcher Paper with its Canadian subsidiary fell over at the 11th hour. Fletcher executives, who had toiled for so long over the proposal, were gutted.

But there was a silver lining to that cloud. Less than six months later Fletcher Paper was sold for $5 billion to Norway's Norske Skog - a sum which staggered the investment community.

Whether the Energy sale will have a similarly happy outcome remains to be seen. According to Shell, the deal is far from dead.

"I am still hearing this is a conditional no," said chairman and chief financial officer Ed Johnson yesterday. "There is work to be done ... but I believe there is enough scope that gives us the capacity to find a way through."

Judging by the market reaction yesterday, many investors agree that all is not lost.

Because the Energy share price collapsed in Australia to the equivalent of 737c on Thursday night after the commission's decision, brokers were expecting a Black Friday when the market opened in New Zealand yesterday.

But after trading to a low of 762c, Energy shares partially recovered to finish at 814c.

That was 13 per cent - or 122c - lower than their close on Thursday, and well down on the record $10.10 reached when the Shell deal was announced.

Brokers said a rally in the oil price helped to calm the storm. Oil prices rose 8 per cent yesterday to $US37 a barrel. Every $US1 increase is estimated to be worth 16c a share for Fletcher Energy.

The other two Fletcher stocks held up well. Building rose 7c to 190c. Forests shares ended flat at 42c after slumping to a low of 38c in early trade amid concern that the planned $517 million recapitalisation was under threat.

But Dr Deane said Fletcher was determined to press ahead with the restructuring of the group.

"In this regard, the rights issue for Fletcher Forests is not dependent on the Shell transaction and will continue as announced."

Dr Deane also commented on the rationale for announcing the restructuring on Tuesday morning.

"Once the transaction with Shell and Apache had been agreed, and the underwriters of the Fletcher Forests rights issue had been put in place, the company was bound to immediately inform shareholders and the market."

Thursday's announcement by the Commerce Commission came after eight weeks of deliberation and three extensions. The release ended up coming out a day early.

The full text of the decision will not be released until early next week.

The commission said only that it was concerned about Shell strengthening its dominance in three markets: the current gas production market; the market for gas production after 2009; and the market for production of liquefied petroleum gas.

Despite the panic when hopes raised by the sale announcement were dashed, energy analysts claimed they were not surprised by the decision.

The acquisition of Fletcher Energy would give Shell an estimated 80 per cent of New Zealand's oil and gas reserves.

Under the Commerce Act, companies are not allowed to acquire or enhance a dominant market share.

At poresent, Fletcher Energy controls 68 per cent of Maui, New Zealand's biggest offshore oil and gas field.

It also owns a third of the Pohokura field, seen as a replacement for Maui, which is expected to be run down by 2009.

Shell is already a partner in Maui and owns 18.33 per cent of Pohokura as well as half of Kapuni, New Zealand's second largest gas field.

Although Shell offered to sell Energy's interest in the Kupe field, Kapuni Gas Contacts and Fletcher Challenge Gas Investments, the commission said the planned purchase would make Shell dominant in the gas market.

But Shell's Mr Johnson said the deal was an extremely important one for his company.

"I am continuing to get strong support from our shareholders of their keenness for us to do this deal," he said. "That only renews my energy."

Mr Johnson said Shell had had a background meeting with the commission yesterday.

"That was to gain first understanding of what those statements around the issues were. There was clarity there and greater understanding.

"But at this point we need to have the full text of the decision, which should be available as early as Tuesday next week.

"We were encouraged to the point you can have various levels of interactions. They can say yes, yes conditionally, no conditionally or absolutely not." So far, he believed the refusal was conditional.

Mr Johnson did not want to pre-empt what the report said.

But he did air his disappointment and surprise at the commission's ruling after weeks of negotiation.

"We had certainly gone from the basis of having a very strong, very robust, original application. Some very clear signals [were given] about divestment and changes in the portfolio that would have met some of the objectives.

"We had answered all the questions and had a number of exchanges [with the commission]. But at the end of the day it appears it was not sufficient at this time - and the way I am reading, it is not yet satisfied on this issue about dominance.

"But the way forward to that is not to say, 'Oh well, fold up the tent.' We are still 100 per cent committed and optimistic.

"It is an extremely important deal for Shell but it is an equally big - if not bigger - deal for New Zealand that we find a way to meet the commission's regulatory objectives and do this deal for the shareholders."