3rd UPDATE:Infratil Consortium In Talks To Buy Shell New Zealand Assets

Utilities investor Infratil Ltd. (IFT.NZ) in consortium with the government New Zealand Superannuation Fund said Tuesday it has entered exclusive negotiations with Royal Dutch Shell PLC (RDSA) over the possible acquisition of Shell New Zealand Ltd.'s refining and downstream distribution and retailing businesses.

In a statement, Morrison & Co. which manages Infratil, said the scope of the proposed transaction includes, but is not limited to, a 17.1% stake in New Zealand Refining Co. (NZR.NZ), Shell New Zealand's supply-and-distribution infrastructure and its retail and business-to-business fuel operations.

"The consortium has submitted a non-binding conditional proposal to Shell and has entered into the final phase of due diligence," it said.

"Discussions and negotiation will continue during November and further advice on the status of the discussions will be provided as material developments occur."

Craigs Investment Partners analyst Geoff Zame said the assets up for negotiation were likely to fetch around NZ$600 million with annual earnings of around NZ$100 million before interest, tax, depreciation and amortization.

He said Shell is probably selling because of the perception of more value in upstream activities, while Infratil was buying because it believed it could secure the assets at a good prices and could add more value.

Another analyst who didn't want to be named said Shell's key driver to sell is concern about environment regulation. Having been hurt in the U.S. and elsewhere, it wanted to avoid the risk of penalties for causing environmental damage from such things as leaking gasoline tanks, he said.

Shell New Zealand late last year said it was conducting a review of its downstream business as part of a strategic review of its global businesses. In May, it appointed UBS AG (UBS) to help with the sale.

Shell also is in exclusive talks with Indian industrial conglomerate Essar Group about plans to sell two refineries in Germany and one in the U.K., a company spokesman said Friday.

It plans to sell about 15% of its global refining capacity, or about 600,000 barrels a day of capacity, in the next three years as part of a restructuring program aimed at increasing profitability and efficiency. It agreed in September to sell its fuel and lubricant businesses in Greece for about EUR260 million.

All of Shell's New Zealand downstream businesses, with the exception of its 36% stake in construction and roadworks company Fulton Hogan, were up for sale.

The company's downstream assets include 230 fuel stations, a marine business, commercial fuel and aviation operations, the New Zealand Refining Co. stake and a 25% stake in Loyalty NZ.

Its distribution network, part of the downstream businesses, includes terminal facilities throughout New Zealand.

Shell in May said it accounts for more than 50% of New Zealand's natural gas production and a big proportion of the country's oil production, which is not for sale.

The upstream businesses comprise a 50% stake in the Kapuni field, an 84% stake in the Maui gas field and a 48% stake in the Pohokura field--all of them located in the country's North Island.

The government in May suspended payments to the New Zealand Superannuation Fund, which has assets of around NZ$15 billion, because of stress on the government's finances. The fund is designed to smooth government pension payments around the middle of the century.

Forsyth Barr broker David Price said Infratil's share price, down 3.0% to NZ$1.60 in late trade, shows the lack of enthusiasm for the deal. The NZX-50 benchmark index was down 0.9%.

Until the deal is finalized and more detail is known, the stock will remain under pressure, he added.

"We don't know enough about it--what's in the deal, how they are going to fund it. There are no synergy benefits. People have received it not that favorably and they need more information."

Infratil said it won't say more until the deal is finalized, with talks to continue through the month.

-By Simon Louisson, Dow Jones Newswires; 64-4-471-5990; [e-mail] Simon Hall contributed to this story.