Markets jolted as Australia blocks Shell's Woodside bid

Australia blocked Royal Dutch/Shell's bid for control of gas exporter Woodside Petroleum Ltd yesterday, rocking the local currency and sparking allegations that the decision was politically driven.

The local currency spiralled nearly 1-1/2 U.S. cents to below 50.5 U.S. cents on fears Australia was closing its doors to foreign investment as the government sought to placate voter unease at free market reforms in a crucial election year.

Analysts had widely tipped the takeover would be approved with some conditions, but a sombre-looking Treasurer Peter Costello told a news conference he thought conditions would not be workable and the bid was not in the national interest.

Shares in Woodside, operator of the giant North West Shelf gas project off Western Australia, Australia's largest resources project, slumped A$1.47 or 10.5 per cent to close at A$12.49.

Shell, which planned to increase its stake to 56 per cent from 34 per cent, had bid A$14.20 a share plus a call option, valuing the Australian company at A$9.3 billion ($4.7 billion).

Analysts and fund managers were shocked by the decision, saying it would send a negative signal to overseas markets about buying Australian assets, and alleged political pressure. "Forget economics, feel politics," said Nomura Australia equities strategist Eric Betts.

Paul Xiradis, director of equities at fund manager Ausbil Dexia, which has about A$1.5 billion in funds under management, said the decision was a surprise given the North West Shelf joint venture was already largely offshore owned. "It certainly will act as a deterrent, but it certainly won't act as a stop for all takeovers," he added.

The Australian dollar, which has been recovering strongly after reaching a record low of 47.75 cents, partly on a belief the deal would go ahead, was stopped in its tracks. Traders said massive selling pushed it down 1.5 cents before a slight recovery buoyed it to US$0.5059/64 at 0800 GMT.

"The danger is now that the Australian dollar will be dogged by perceptions that the Australian government is anti-foreign investment," said JP Morgan senior economist Monica Fan.
Shell Australia said that it was deeply disappointed, but remained committed to Australia and its stake in Woodside.

Oil analysts in London were downplaying the significance of the decision to Shell's determination to shift its portfolio to gas. Shell, with a market value in excess of $200 billion, dwarfs Woodside.

"Maybe they should consider more significant acquisitions which may fundamentally change the way that they have gas exposure in the world, and perhaps particularly in the U.S.," said Ed Westlake, an analyst at JP Morgan.

Woodside was not the only hostile target in Shell's sights. It has also launched an unwelcome $1.8 billion bid for Barrett Resources Corp, hoping to add the U.S. company's Rocky Mountain natural gas reserves to its coffers.

Westlake said the Woodside decision would be disappointing to Shell because of all the management time it had invested. Other analysts were sceptical that Shell might come back with an improved offer for Woodside.

Treasurer Peter Costello said the decision to block Shell's bid was his alone, after the nation's Foreign Investment Review Board was unable to say conclusively whether having Woodside under foreign control threatened the national interest.

The conservative coalition government, facing an election by year-end, had been under intense pressure from within its ranks to block the bid for Woodside.

While admitting the rejection of a foreign bid was nearly unprecedented, Costello said the sale of liquefied natural gas (LNG) from the North West Shelf had the potential to become Australia's largest export and should be protected.

Opponents of the Shell bid had argued the deal would hand control of the key resource to a foreign company which might give higher priority to its competing natural gas projects in other parts of Asia.

Costello stressed the decision was a one-off, rather than a change of policy. "Australia welcomes foreign investment, there's no change of policy there. But we also have to have an eye to the national interest for maximum exploitation of our resources," he said.

BHP Ltd, a one-sixth stakeholder in the North West Shelf gas venture which has said it might submit an alternative proposal with Woodside if the Shell bid was rejected, had no immediate comment on the government's decision.

Woodside said it would speed talks with other companies on a merger or asset swap plan. "On the basis of discussions to date, it is likely that any proposal which may be submitted would be in the form of an asset transfer or merger proposal rather than a takeover bid," Woodside said in a statement to the Australian Stock Exchange.

"I don't think it's something that could be interpreted as anything other than a lost opportunity - for Australia, as well as for Shell, and for Woodside," said Shell Australia chairman Peter Duncan.

Duncan said Shell remained committed to Australia, including its one-sixth stake in the North West Shelf venture and its 34 per cent stake in Woodside, but would take time to decide whether to return with another proposal.

"We react to something like this, which I personally have felt passionately about, with considerable disappointment, and I think it's sensible to sit back, allow that to calm down and think about the best way to move forward," he told reporters.

After a similar blow late last year from New Zealand regulators on a bid for Fletcher Challenge Energy, Shell returned with a new plan which was eventually cleared. Woodside has said it was talking to BHP Ltd, the only other Australian stakeholder in the North West Shelf, and Santos Ltd, Australia's other large independent oil and gas producer, about alternative plans which could come into play if Shell's bid was barred or approved with conditions.

"Discussions with those parties will continue with a view to ascertaining whether they are now prepared to commit to firm proposals," Woodside said on Monday. While BHP reiterated it was watching the North West Shelf situation closely, chief executive Paul Anderson told reporters last week BHP was now focused on its US$28 billion merger with Billiton Plc, due to close in June. Santos had no immediate comment.

The bid was prohibited despite the fact the North West Shelf venture is already four-sixths owned by foreign companies, including Shell, and all major capital decisions on the project require unanimous approval.

Shell had promised the government Woodside would remain an Australian listed company, headquartered in Perth, its current chairman would remain and the board would continue to have some independent directors, but those undertakings were not enough.

Costello instead backed the arguments of bid's opponents, saying if Shell took control of Woodside, the Anglo-Dutch giant might give its own competing natural gas projects priority over maximising exports from the Australian project. "It's in Australia's national interest that Australia's exports are pushed and promoted in preference to exports from any other area," Costello said.

Besides Woodside, BHP and Shell, the remaining stakeholders in the N