Idemitsu's internal mudslinging having far-reaching ramifications

Updated : 05.09.2016 / Category Economy


This is no longer a feud affecting just the founding family of Idemitsu Kosan Co. Ltd., Japan's second largest oil wholesaler. In mid-August, the head of one of Japan's three megabanks received a phone call from the Ministry of Economy, Trade and Industry.

"Your bank doesn't really intend to antagonize the ministry, does it?" the senior METI official said down the line.

In early August, the second act unfolded in the tense drama between Idemitsu's founding family and the company's management over the plan to merge Idemitsu with Showa Shell Sekiyu K.K., Japan's fifth-largest oil wholesaler. The founding family opposes the merger. On August 3, Shosuke Idemitsu, the eldest son of founder Sazo Idemitsu and holder of 34 percent of Idemitsu shares (with voting rights), announced he had bought a 0.1 percent stake in Showa Shell for about ¥400 million.

Idemitsu planned to make a private purchase of Royal Dutch Shell PLC's 33.24 percent stake in Showa Shell for ¥1,350 a share around the end of September. However, when this stake is combined with the stake now held by Shosuke, it would exceed one-third of all shares issued by Showa Shell. Under Japanese law, Idemitsu would then be required to launch a formal takeover bid. If this were to occur, all parties in the bid—namely Idemitsu and Shosuke, who is honorary chairman—would have to declare the number of shares they possess. Shosuke reportedly has no intention of revealing how many additional Showa Shell shares he will buy.

Idemitsu management was furious with the founding family's ploy to block the merger. "With this, Idemitsu can no longer buy Showa Shell," declared Takujiro Hamada, a lawyer representing the founding family, vexing Idemitsu executives in the process. Amid all this, questions were being raised over where Shosuke might get the capital to purchase extra Showa Shell shares.

This speculation sparked METI's aforementioned phone call to the bank. "Don't lend money to the founding family" was the thrust of the ministry's message. After all, the government supports consolidation among Japan's refiners as demand is pinched by a falling population and a shift toward more fuel-efficient vehicles. If the planned merger between Idemitsu and Showa Shell falls through, realignment of the industry could go back to square one.

Another high-ranking METI official believes two people have been influential in shaping Shosuke's maneuver: "His wife and that old man are lurking in the background," the official said resentfully.

'Old man' maneuvering in the shadows
As Sentaku reported in its August issue, the grudge held by Shosuke's wife, Chieko, toward Idemitsu management is believed to be at the heart of the feud. She is displeased that their eldest son, Masakazu, and second son, Masamichi, have not yet reached the highest ranks of Idemitsu, despite their bloodline and being aged in their mid-40s.

The family members probably take pride in always putting the company first, rather than trying to make easy money. When Idemitsu went public in 2006, they did not sell off their shares and amass a vast fortune. Listing on the stock market was done to allocate new shares to third parties and increase capital through a public offering.

Furthermore, the family members have loyally obeyed Sazo's final instruction: "Don't be a slave to money." The founding family is not driven by a strong desire to rake in huge profits for itself. The family earns about ¥400 million annually through dividends of ¥50 per Idemitsu share. While undoubtedly wealthy, how could the family purchase more Showa Shell shares?

To keep the deal on track, Idemitsu senior management, including Chief Executive Officer Takashi Tsukioka, is considering lowering the volume of Showa Shell shares it will buy from Royal Dutch Shell at the end of September. If Idemitsu opted to cap its stake at 20 percent, the founding family would have to buy up more than 13 percent of Showa Shell shares—far more than the 0.1 percent it holds now—to get over the one-third threshold and force a formal tender offer. Buying this larger stake would easily cost more than ¥50 billion. But with METI breathing down the necks of the megabanks, they will not lend any money to the founding family.

Enter "that old man," as the high-ranking METI official called him. He was referring to Nobuyuki Nakahara, a former president of what is now TonenGeneral Sekiyu K.K. and a former member of the Bank of Japan's policy board. Nakahara is known as an advocate of setting targets for the inflation rate, and he helped shape Japanese Prime Minister Shinzo Abe's views on economic policies.

When Nakahara was president of Tonen, then a refining subsidiary of ExxonMobil—a company with foreign capital—it was poles apart from Idemitsu, which is wholly Japanese in origin. Even so, Nakahara and Shosuke surprisingly share many things in common. Both are the eldest son of a founding family, both studied in the United States, and, above all, both feel strong indignation at the METI-led realignment of the oil wholesale industry through regulations that effectively forced cuts in refining capacity. Three years ago, Nakahara was even involved in a scandal that sought to bring down Jun Mutoh, the TonenGeneral president who favors a conciliatory approach to the ministry.

After getting dragged into the scandal, the then chief of METI's Natural Resources and Fuel Department, who was widely viewed as a prime candidate to become the administrative vice minister, was temporarily demoted. Since then, METI has been very wary of "that old man." Hamada's businesswoman wife, Makiko, reportedly has acted as a go-between, linking Nakahara and Shosuke.

"Mr. Nakahara was a former member of the Bank of Japan's policy board, so he has many connections in financial circles in Japan and abroad," a securities industry insider said. "It would probably be easy for him to introduce Shosuke to overseas banks or investment funds."

If Nakahara enables Shosuke to borrow money and block Idemitsu's acquisition of Showa Shell shares, the merger would inevitably face an increasing risk of collapse. That would also have a subtle impact on the merger between JX Holdings, Japan's largest oil wholesaler, and TonenGeneral Sekiyu. Their agreement to merge next year was finalized on August 31, and both companies plan to vote on the plan at extraordinary shareholder meetings due to be held at the end of the year. TonenGeneral will be feeling the most anxious about how the next few months pan out.

TonenGeneral, which pays high dividends, originally stood out from other wholesalers by having a floating stock ratio of 18 percent. If Nakahara, an individual investor in TonenGeneral, attends the meeting and talks about a possible breakdown in merger talks between Idemitsu and Showa Shell, thus stirring up the attendees, it is not certain that TonenGeneral could secure approval for the deal from two-thirds of the shareholders.

If this scenario was to unfold, Mutoh would be forced to step down as president to take responsibility, giving Nakahara revenge against the man he has bluntly derided for "hijacking Tonen." Furthermore, Tsuyoshi Kameoka, the chief executive officer of Showa Shell who once leaned toward a tie-up with TonenGeneral, might consider rekindling those ties.

The end result would be that the intra-corporate feud at Idemitsu would have a domino effect on other wholesalers, scrambling the framework of the industry's consolidation.

'Revenge' for ignoring promotion hint
On April 9, a reception was held in Tokyo's Moto-Akasaka district to celebrate the wedding of the founding family's second son. According to one of the 200 invited guests, Tsukioka used his speech to call for cooperation between Idemitsu's founding family and its current management. "As our industry undergoes consolidation, the role of the founding family becomes important," Tsukioka reportedly said. "I want to work together with Masamichi to bring more success to the company." Shosuke was said to have looked pleased with proceedings. This reception was held about three months before Hamada publicly revealed at a general shareholders meeting that the founding family opposed the planned merger with Showa Shell.

Hamada has explained that he "had no option" but to declare the founding family's position, as he had not received sincere responses during two rounds of talks with management on January 29 and June 9. However, well-informed sources suggest otherwise. The spat originated on December 17, 2015, when Shosuke handed Tsukioka a message outlining the "opinion" of the founding family regarding the merger. "Please keep this to yourself," Shosuke reminded him.

Although the message expressed concern about dilution of the founding family's 34 percent stake, there was no statement explicitly opposing the merger. In fact, the message hinted that promoting Masamichi to company director would be a condition for the family's approval.

Masamichi has been working at Idemitsu's Integrated Supply & Trading Department for years, but he has not risen even to section-chief position, despite being 45 years old. Unlike his brother, Masakazu, who had health problems at one point, Masamichi is eager to climb the corporate ladder. Family members thus have high expectations of Masamichi, and they refer to him as the "second coming of Sazo."

The January 29 meeting between the founding family and management—also attended by Masamichi—was reportedly tension-free. At the time, the founding family was busy preparing for Masamichi's wedding, while Shosuke was holding amicable meetings with Tsukioka to discuss arrangements for the wedding.

Tsukioka, however, was startled by an unexpected letter from Hamada on May 24, titled "Opinion No.2," which declared the founding family's opposition to the merger for the first time.

Why did the family make this about-face?

"Idemitsu usually announces board member appointments around May 10, but there were no new board members this year," said an informed source, indicating that the founding family was furious over Tsukioka ignoring its hint that Masamichi be appointed to the board.

Sazo's teachings evaporate
What does Shosuke really want to accomplish? If his true intention is to block the Idemitsu-Showa Shell merger, he need not have played such a cheap trick as acquiring the 0.1 percent stake in Showa Shell. All he would have had to do was reject the merger plan at an extraordinary shareholders meeting later this year.

Even so, Shosuke continues to send provocative letters to the management through a law firm, where Kenichi Kanbe, the lawyer jointly representing him in conjunction with Hamada, is a partner. Kanbe is well versed in the Companies Act, as well as the Financial Instruments and Exchange Act.

The lawyers have nothing to lose. The more serious the founding family's feud with the management becomes, the more attorney fees Hamada will rake in. Kanbe's star as a jurist will rise if he can lead Nishimura & Asahi—the law firm hired by Idemitsu—by the nose. If the founding family is able to impress on the public how incapable Tsukioka and other board members are, the family may regain its grip on the company reins. If that happens, Masamichi helming the company is not beyond the bounds of possibility.

It seems to be difficult for Idemitsu to straighten out its tangled relations with the founding family. Though the company might be able to acquire a sizeable stake in Showa Shell by the end of September, it has no assurances that the merger plan will be approved at the shareholders meeting. A last resort would be to increase its capital to block the family's opposition.

At the shareholders meeting, 47.2 percent of the votes, including those of the founding family, were cast against Tsukioka's reappointment as president. If the company wants to attenuate such opposition, it will have to boost its capital by about ¥100 billion. But the market is unlikely to hanker for more Idemitsu shares, which have a price book-value ratio of less than 0.6. But, if Idemitsu opts to increase its capital through a third-party allocation to Showa Shell, the two firms will hold each other's shares, dispelling possible Showa Shell concerns about being placed under Idemitsu's umbrella.

"If that happened, Idemitsu shares would likely nosedive, while Showa Shell shares would rebound slightly," opined the aforementioned securities industry source. "The founding family bought Showa Shell shares—which have dropped 20 percent in price since the feud surfaced—at a very low price. If the family sells its shares on, it might be able to turn a profit."

But is Shosuke aware that his actions are negatively impacting the worth of his company? If he profits by selling Showa Shell shares, it would be unfair on other Idemitsu shareholders. His father, Sazo, taught that one must possess the spirit of a samurai spirit while honing one's talents as a merchant. But these words seem to have evaporated from Shosuke's mind.


This is a translation of an article from the September 2016 issue of Sentaku. The original article can be found here.