Energy giant Shell’s (LON:RDSB) £47bn takeover of smaller rival BG Group (LON:BG.) is a “compelling deal from a value perspective” insists Shell boss Ben van Beurden.
The mega-merger, announced early on Wednesday, is the second biggest oil and gas deal on record after Exxon and Mobil's US$75.3bn merger in 1998.
Under the terms Shell - which already the largest FTSE 100 constituent by a considerable margin - is paying a 52% premium to the average price of BG the shares over the past 90 days.
Speaking to analysts van Beurden stressed that a tie-up had always made sense. Still, the merger seems to have been brought to life by slumping crude oil prices, which have fallen by 50% in the past six months.
However, Shell shares headed 7% lower in afternoon trading with some investors expressing concern that the bid was too high, and that the company was making a risky bet that oil prices will recover from their present lows.
“Paying such a significant premium given the current environment will require even greater discipline on capital and focus on costs than Shell has already achieved in recent years,” said Nicolas Ziegelasch, head of equity research, Killik & Co.
“While we have had a Buy rating on Shell given its strong balance sheet, we may need to re-evaluate this as more details emerge of what the resulting entity will look like.”
The enlarged group will have complementary operations in 15 countries worldwide, enabling the consolidation of many of both the firm's existing operations, especially in Brazil and Australia where the combined entity will have leadership positions.
The deal will also pair Shell’s production expertise with BG’s high quality asset base; for example BG’s Atlantic basin LNG deposits will now have access to Shell’s numerous regasification operations in the United States.
Van Beurden denied Shell was overpaying. "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,” he said.
He also pointed out the financial strengths of the combined company. There would be savings of $2.5bn a year by 2018 he said, through a reduction in capital expenditure - particularly its spending on exploration. He also made the point that the new company would divest assets worth $30bn between 2016 and 2018.
Meanwhile, BG shares soared 30% on the news. “While as a stand-alone entity BG still has a strong portfolio of assets and growing production rates, the link-up with Shell enables BG to accelerate and de-risk much of its production pipeline,” added Killik’s Ziegelasch.
“With the deal currently at a significant premium to the market price and the prospect of a cash return for BG, the deal is very positive for BG shareholders after what had been a difficult 2014 for the company."
BG Group warned in February that it would write down the value of its oil and gas assets by nearly £6bn (US$9bn) due to the oil price slump.
A month before that, Shell announced that it would be cutting spending by nearly £10bn over the next three years.
Marc Kimsey, senior trader at Accendo Markets, reckons the deal will prompt sector consolidation.
“The decline in oil price over the past year has battered some stocks which are clearly now looking attractive.
“In the last year BG shares fell 30%, shares in Tullow Oil have fallen 65%, Premier Oil down 55%, and Petrofac down 20%.
“By comparison sector behemoths BP and Royal Dutch Shell have only shed 10% over the same period leaving them in the position of predator rather than prey.”
Van Beurden will lead the combined group while BG’s chief executive Helge Lund will stay on until the deal is complete.
Lund, who was previously boss of Norwegian firm Statoil, has only been in the top role at BG since early February.
The company will not yet confirm how much he will receive for his time as chief executive. So far he has been in the post for 59 days.
But Lund could walk away with as much as £25mln, even after investors forced the company to scrap a controversial package awarded to him when he took the job.
BG's board revised his proposed £12mln upfront shares bonus, after shareholders and the Institute of Directors complained.
Even so, the pay out that Lund is likely to receive will raise eyebrows.
BG Group ended the day up 27% at 1153p, with a market capitalisation of £29.12bn. Royal Dutch Shell's "B" shares - the more widely traded class in the UK - closed at 2,019.5p, down 8.6%, giving a market cap of £130.7bn.
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