Deal may herald more mega mergers

Royal Dutch Shell unveils £47bn takeover of gas giant BG

ShellRoyal Dutch Shell is to acquire gas company BG Group in what will be the biggest takeover deal so far this year.

The £47 billion recommended offer emerged last night and the merged company will be valued at £224bn.

In a joint statement, the firms said that Shell would pay 383p in cash and 0.4454 Shell B shares for each BG share.

The represents a premium of around 52% to the 90 trading day average and will result in BG shareholders owning around 19% of the combined group.

BG Group, the third biggest energy company in Britain, revealed in its year-end results in February that it had suffered a £5.9bn pre-tax impairment charge mainly due to the falling oil prices.

Shell announced in January that it is taking £10bn out of costs and is continuing to trim its headcount.

With oil at less than half its price last summer companies have been looking to rationalise operations.

M&A is one route they are going down. Halliburton revealed last November a tie-up with Baker Hughes and analysts believe this year will see a flurry of mergers in the sector. In the first quarter, deal volume rose 24% to $874.1bn (£590bn) globally.

Jorma Ollila, chairman of Shell said: “This is an important transaction for Shell, accelerating the delivery of ourstrategy for shareholders. The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world.”

Ben van Beurden, chief executive, said: “Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us.

“BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell’s growth priorities and areas where the company is already one of the industry leaders.”

Andrew Gould, chairman of BG said: “This offer represents an attractive return for BG shareholders. BG has a strong portfolio of operations including growth assets in Australia and Brazil and a highly competitive LNG business, as well as an enviable track record of exploration success.”

BG Shareholders will receive their final dividend for 2014 of 14.37 cents (9.52p) per BG Share which has already been announced by BG, as well as an interim dividend in respect of the six month period up to 30 June 2015 of not more than the interim dividend in respect of the six month period up to 30 June 2014 of 14.38 cents per BG Share.

Brewin Dolphin analyst Iain Armstrong said RDS’s oil and gas reserves will increase by a quarter and production from the combined group will increase by one fifth.

“The most striking outcome of the combination (if it happens) is the enhanced position in LNG [liquid natural gas]. The addition of BG will make RDS the largest natural gas producer in the world. RDS bought the LNG operations of Repsol in 2014 and the addition of the superb global logistics and QCLNG will increase that lead over its competitors.

“The other good fit is in the deepwater portfolios with RDS getting hold of BG’s pre-salt assets in Brazil and increasing the exposure to the North Sea, thereby benefiting from the tax changes.

“RDS also benefits from BG’s exploration portfolio, particularly in Tanzania. RDS has been unsuccessful in gaining a foothold in East Africa. BG’s exploration track record is significantly better than RDS’s. BG’s reserve replacement ratio has been over 100% for six out of the past seven years in contrast to RDS where the reserve replacement ratio was 26%.

“Our initial opinion is quite cautious, given the industry’s track record in destroying shareholder value. However, in the long term, the combined group will benefit from being the second largest oil and gas company.

“The $25bn share buy back from 2017-20 will also help to offset the EPS dilution from the increase in the number of shares but the reduction in return on investment capital in the near term is significant and the boards of both sets of companies will have a huge task on their hands to convince shareholders. Ultimately, we think that they will succeed and there will be one less company for analysts to follow.”

Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend Fund, said: “The acquisition of BG by Shell has occurred for two main reasons. First, although BG had some first class assets, it has struggled to develop them as smoothly as hoped in recent years. Shell has a wider pool of expertise and substantially greater access to investment capital.

“Second, this gives Shell a presence in the productive zone off the coast of Brazil, and will ensure that Shell’s own production is maintained over the medium term, taking away the requirement to make large discoveries to offset natural depletion.

“It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell.  There is no danger that Shell will change its dividend policy.”

Leave a Reply

Your email address will not be published. Required fields are marked as *

This site uses Akismet to reduce spam. Learn how your comment data is processed.