Shell tried to simplify 16 years ago by merging its two founding firms: Royal Dutch Petroleum Company of the Netherlands and Shell Transport and Trading Company of the U.K. The unified company was U.K.-incorporated with its headquarters and tax residency in the Netherlands. Two classes of stock were created: A-shares that pay regular dividends subject to Dutch taxes, and B-shares whose cash payouts are derived from U.K. earnings and, therefore, exempt from those levies.
At the time, this convoluted arrangement appeased political sentiment in the U.K. and the Netherlands. But it has limited Shell’s room for maneuver. The business can’t make a sizable takeover offer to be paid in B-shares without Dutch approval. That disadvantages Shell in bidding for assets against a rival without the same encumbrance. And in any takeover bid where stock is offered, there’s the risk that the two classes of shares diverge in price, complicating the process. Merger arbitrageurs could have a lot of fun.
When Shell wants to return cash to investors through a share buyback, there are only so many B-shares it can buy. Clearly any corporate spinoff is going to be easier when management doesn’t have to think about how to parcel up assets to maximize the U.K. earnings stream that can pay tax-efficient dividends.
Small wonder that activist Third Point LLC made optimizing the corporate structure number one on its wishlist revealed last month. The others — breaking up Shell into distinct legacy fossil-fuel and energy-transition businesses — appear to depend on it.
The simplification is more evolutionary than Unilever Plc’s last year, given the then former Anglo-Dutch consumer goods group was previously still two separate companies. And many in the Netherlands may be glad to no longer house the HQ of a mammoth fossil-fuel business. Shell says the move has no impact on the Hague legal ruling in May forcing it to accelerate emissions reduction. All the same, the negative Dutch feeling towards the company is hard to ignore.
Shell’s half-baked simplification in 2005 was effectively a stop-gap solution pending a softening of the Dutch fiscal regime on dividends. That reform hasn’t materialized. A structure designed to protect U.K. shareholders from Netherlands taxes now carries a relevant strategic cost in terms of weaker dealmaking capacity. Fiscal, strategic and popular pressure are powerful in combination.
Assuming Shell gains the necessary approvals and the Netherlands is unable to erect barriers to exit, what next? The company has advocated an integrated strategy in the energy transition, rather than breaking up. Investors can clearly expect more buybacks. An impediment to spin-offs has been removed at least.
The question remains whether Shell can really buy its way to transformation in its current form via more share-based takeovers. A simplified share structure removes one deterrent to targets accepting Shell stock as payment. But the lowly valuation of its shares means its own investors may be wary of dilutive deals, while investors in renewable-energy targets may be wary of receiving stock in what remains largely a fossil-fuel business. Shell may soon have simpler shares — but it’s still the same company.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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