Why shareholders will scuttle Woodside's Shell game

Woodside's buyback of Shell's residual shareholding looks likely to fail, providing its opponents with an opportunity to force Woodside into an 'equal access' buyback for all shareholders.

With almost 60 per cent of those entitled to vote having lodged their proxies, 71.3 per cent of the votes are in favour of the buyback but 28.7 per cent are against. The proposal needs a 75 per cent majority of the votes cast to be approved.

Despite heavy lobbying by Woodside, there remains a significant core of institutional opposition to the deal, ostensibly because the selective nature of the buy-back -- only Shell would benefit directly -- breaches the corporate governance principle that all shareholders should be given an equal opportunity to participate in any benefits from a transaction their companies is engaged in.

There is, of course, a more self-interested dimension to the opposition. There are institutions who hope that by voting the Shell buyback down they will force Woodside into a general or 'equal access' buyback that would give them a highly tax-effective opportunity to sell some of their shares.

They might also be hoping for an extra benefit. Under the buyback proposal Shell, which has already sold 9.5 per cent of Woodside (out of its original 23 per cent shareholding) on-market, would see another 9.5 per cent holding buyback by Woodside, leaving it with only 4.5 per cent.

If the buyback is rejected by shareholders Shell would remain a seller of the 13.5 per cent of Woodside it would be left with. The wider Shell group is in the middle of a massive global non-core asset sales and cost-reduction program.

The institutions may well be anticipating that if they vote down the buyback they will not just force Woodside into a general buyback but may also get access to Woodside shares at a meaningful discount if Shell is forced to dump them into the market. Woodside is significantly under-geared and has about $US3 billion of franking credits.

As discussed previously (Woodside’s non-Shell shareholders have nothing to lose, July 24) there’s not much downside and some potentially significant upside for the institutions in opposing the buyback.

To the extent there is downside it would relate to the missed opportunity for Woodside and its shareholders to buy a significant chunk of its capital back at a 14 per cent discount to market, which would improve the earnings and dividends per share for the non-Shell shareholders.

While there has been a focus from some of the institutions on the fact that the Shell buyback would use up about $US1bn of Woodside’s franking credits, with another $US2bn in reserve and more being created on a daily basis, it is doubtful that those which would be deployed in the Shell buyback would ever have any value to shareholders.

Woodside itself is anxious to get Shell off its register in a controlled fashion, ridding the market in its shares of a major over-hang. This may be a potential complicating influence over any future plans to raise new capital while deploying its excess franking credits and under-leveraged balance sheet during a period where it doesn’t have any major new growth projects to fund.

If the buyback is voted down tomorrow, at least the directors, while no doubt embarrassed by their failure to win sufficient support from their shareholders, can console themselves that the size of the Shell 'problem' has been reduced by the earlier on-market sale.