Nippon Oil, Mitsubishi Oil agree to merge

Nippon Oil Co. and Mitsubishi Oil Co. have agreed to merge, forming Japan's largest oil company. Nippon Oil, Japan's second-largest refiner/marketer, and Mitsubishi Oil Co., the sixth largest, last week said they have agreed to a merger that becomes effective Apr. 1, 1999.

Nov. 2, 1998

3 min read

Nippon Oil Co. and Mitsubishi Oil Co. have agreed to merge, forming Japan's largest oil company.

Nippon Oil, Japan's second-largest refiner/marketer, and Mitsubishi Oil Co., the sixth largest, last week said they have agreed to a merger that becomes effective Apr. 1, 1999.

Boasting a scale unprecedented in the history of Japan's petroleum industry, the combined firm will have revenues of more than ¥3.6 trillion ($30.2 billion) and a 24% share of the domestic refined products market, knocking Idemitsu Kosan Co. out of the top spot. Idemitsu controls around 16% of Japan's refined products market.

Although the total refining capacity of the new firm was not yet clear at presstime-as some refineries in the Nippon Oil group are only partly owned by Nippon Oil-the new company will probably also become the country's largest refiner. The Nippon Oil group currently has a refining capacity of about 1 million b/d, about 580,000 b/d of which is wholly owned by Nippon Oil. The Mitsubishi Oil group's capacity is 475,000 b/d. Both firms also have upstream divisions.

One Mitsubishi Oil share will be exchanged for 0.525 share in Nippon Oil, and the new firm will be capitalized at ¥137.16 billion ($1.15 billion) and have total assets worth ¥2.6 trillion ($21.8 billion), 14,700 service stations, and 4,400 employees. Japan's downstream oil industry-its upstream sector is limited largely to foreign investments, given a tiny domestic presence-has seen major restructuring and consolidation in recent years, a trend exacerbated by the Asian economic downturn.

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The two firms have been cooperating since 1984 in areas such as wholesale distribution. There is little overlap between their refinery sites, and both have big affiliated retailers.

Nevertheless, the move took the market by surprise, given that Mitsubishi Oil had been in talks with Showa Shell Sekiyu over the integration of their refining operations.

The goal of the merger is to capture a larger share of the market and boost cost-competitiveness. In addition, the two firms aim to promote rationalization amid intensifying competition by consolidating service stations.

"The merger would save costs of ¥14 billion in production, ¥15 billion in distribution, ¥15 billion in sales, and ¥26 billion in administration," Nippon Oil Pres. Hidejiro Osawa said. Osawa will be president of the new company, and Mitsubishi Oil Pres. Yoshihiko Izumitani will be chairman. Osawa also stressed the merger should not be considered a rescue of Mitsubishi Oil, which recently posted heavy losses, by Nippon Oil.

Analysts point out that the full-blown merger will allow the new company to benefit from Nippon Oil's strong retail network and massive cash reserves and Mitsubishi Oil's strengths in exploration and development.

Analysts also warn that, while the merger has huge potential, the key to its success will be the extent to which it can implement cost-cutting measures. Indeed, Mitsubishi's Izumitani warned that the merger would inevitably mean a reduction in work force, although he would not say by how much.