Shelling out for Fletcher

By GEOFF SENESCALL

Expensive French champagne is out at Royal Dutch Shell's Wellington office.

"We are down to a beer budget," said a relieved Ed Johnson - chairman of Shell's local operation - yesterday after the Commerce Commission finally approved a $4.3 billion bid for Fletcher Energy.

If the number of divestments Shell has had to promise to to get clearance from the competition watchdog is anything to go by, the oil giant's fridge does look pretty bare.

While Shell is still left controlling the key Maui and Pohokura fields, it has agreed to divest itself of 11 of Fletcher Energy's oil and gas assets.

Mr Johnson is not entirely happy. He makes no secret of the fact that Shell is still assessing its legal options on whether to contest the commission's decision to knock back its original application last month.

"We continue to believe some of the assessment and analysis of this very complex industry and the marketplace isn't clear enough as yet and could cause problems with precedents for the future."

Shell was still considering whether to appeal - "Our view will crystallise over the next several weeks."

But while celebrations might be muted, Mr Johnson says "it is a very positive feel-good story for us now."

For the market, the feeling is one of elation.

Had the commission delivered another no, it is likely the Fletcher Energy share price would have slumped well below $8.00 as it did last time.

Fletcher Challenge would probably have had to turn to the less-attractive plan B, which was to spin its energy division off into a standalone business to expedite the restructuring of the rest of the group.

But that is now history unless shareholders vote no in March - an unlikely prospect.

As one broker quipped: "Fletcher's will have to strike gold for that to happen."

No final hiccups are expected, judging by the Fletcher Energy share price yesterday, which jumped 72c to $9.22.

The wider market also revelled in the deal.

With a whopping $3 billion in cash being released from the sale of Fletcher Energy, a decent slice is likely to find its way back into the local market.

Certainly, brokers are hoping that most of the New Zealand owners who hold around 40 per cent of the shares will reinvest in other stocks. There are already signs that people are looking to reinvest their profits.

The New Zealand dollar also rallied on the prospect of a decent chunk of the cash Shell is dishing out being repatriated.

Shell's offer - which is in conjunction with the US oil company Apache - is in three parts.

It includes $US3.34 in cash; a shareholding in a new company called Rubicon; and a distribution of one Capstone Turbines share for every 70 Fletcher Energy shares.

All up, the deal is now worth $4.3 billion, or $10.50 a share. When the deal was announced in October, the offer was valued at $4.6 billion or $11.22 a share.

But since then the New Zealand dollar has strengthened against the US dollar, meaning the $US3.34 buys fewer kiwi dollars.

Furthermore, the price of Capstone has fallen from around $US48 a share to $US35. The fall wipes just over $250 million off the original price.

The offer price will continue to fluctuate till Fletcher Challenge completes the separation of the group in March next year, when the sale will take place.

The commission's ruling comes nearly three months after Shell made its first application.

The Commerce Act manager at the commission, Geoff Thorn, says the decision to clear Shell was not made until yesterday morning.

"However, we knew late the previous night that we were leaning in a particular direction."

It is a complex issue. But the commission is satisfied that no dominance will occur any of the three gas markets identified: the current gas market; the gas market beyond 2009; and the LPG market.

Mr Thorn says that no advice was given to Shell, despite the oil company's making a late amendment to its application by offering to sell two further assets.

"What happens with these things is that additional divestments get made during the process, and one of the reasons for that is that the applicants make their own assumptions and draw their own conclusions from the nature of the questions we ask.

"We don't go to them and say, 'Look this is where it is going.' We simply go and ask questions about the areas of concern."

Mr Johnson backs this up by saying that the commission made it clear all along that it was not in a position to negotiate.

Shell only found out it had gained clearance at the time the market was informed, he says.

Making the announcement in the morning meant "we were pleasantly surprised and relieved that the anxiety of the day was foreshortened."

Mr Johnson confirmed that despite the need for asset sales, there would be no adjustment to the original deal with Fletcher Challenge.

"While it potentially has an impact on the economics, it is still a very substantial deal."

It is broader that just the New Zealand assets, Mr Johnson notes. It includes assets in Brunei, Canada and Argentina.

Shell has asked the commission for 12 to 18 months to complete its required sales of Fletcher Energy assets.

Getting clearance is just the first step, says Mr Johnson.

"We are now getting stuck into thinking about the operating issues. Dialogue with Fletcher Energy staff has begun. We will progressively participate in their management decision process up to the time we have completion.

"To this point, the majority of the day-to-day decisions have been with Fletcher Energy."

Shell intends making further investment in infrastructure and will undertake more production and exploration, Mr Johnson says.

"All of those things must be a good news story for New Zealand because it will bring new technologies, growth opportunities and, I would suggest, employment opportunities through the upskilling and use of the new technologies.

"I would hope that the Commerce Commission vote about dominance will give those in Taranaki some comfort."

Shell will not keep an Auckland office.

Meanwhile, local institutions greeted the news positively.

Stephen Walker, of AMP, admitted that he did not think the deal would get through.

" I think it is a good deal for Shell, because with what they already own they can extract more value out of it, which is why you had Commerce Commission concerns.

"Given that, that is why the Fletcher company has got such a good deal."

Andrew Bascand, of AXA, believes the deal is positive for New Zealand investment.

"Most importantly, foreign investors mistook the original Commerce Commission turndown of this as a decision by the Government to turn it down.

"It appears they didn't understand the Government had nothing to do with it.

"So at the time it just looked as if the Government was interfering, which wasn't the case," said Mr Bascand.

"I think the fact this has got through now. Foreign investors will be pretty happy with it all and they may have a positive view of New Zealand.

"I see there has already been some expectation of that with the rise in the New Zealand dollar."