Nippon Oil will use its recently built-up stake in Teikoku Oil to prise exclusive collaboration deals from the new Teikoku-Inpex merged entity but is likely to stop short of trying to block the creation of a national oil champion, people familiar with the situation said.

On Tuesday, Nippon Oil, Japanese oil refiner and distributor and Teikoku’s largest shareholder, said it spent Y16.7bn ($140m) to raise its stake in Teikoku from 16.5 per cent to 20.4 per cent, triggering speculation that it might seek to block the merger or force Inpex to raise its offer.

The move came after state-backed Inpex said this month that it planned to merge with Teikoku in an all-share deal that valued Teikoku at about $3bn.

The creation of what would be Japan’s biggest oil and gas development company has the blessing of the government, which wants one company to spearhead efforts to improve national energy security. 

Hoewever, the merger would cut Nippon Oil’s original 16.5 per cent stake in Teikoku to a mere 3.08 per cent in the merged entity. Even after building up its shareholding, Nippon Oil will have only a 3.81 per cent stake in the new company. 

An article in the Nikkei newspaper on Wednesday reported a Nippon Oil official saying the company was seeking to clinch business ties with the new group before an extraordinary shareholders’ meeting in January to vote on the merger.

“We will make various proposals, including operational consolidation and tie-ups to Teikoku,” the Nippon Oil official was quoted as saying. “Consolidation in the upstream operations alone will be insufficient for creating a major oil company.”

A person close to the deal said the government was more interested in creating a specialised exploration and development company than in one that combined upstream and downstream operations.

Nippon Oil’s stake falls short of the 33 per cent needed to block the merger. However, observers said that, should Nippon Oil vote against the deal, Teikoku might struggle to secure the necessary two-thirds majority.

The government, which holds a 36 per cent stake in Inpex, is unlikely to sit by and watch Nippon Oil try to muscle in on the deal, analysts said.

One market participant said Nippon Oil would probably use its built-up stake to win favourable contracts from the merged entity, but would likely refrain from going hostile. “Do they fight the government over this?,” he said. “I think they would be politically stupid to do so.”

Traders began to speculate that Nippon Oil was building up its stake earlier this month when Teikoku’s share price rose to more than 6 per cent above Inpex's offer.

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