Shell share price on the retreat after £47bn BG Group merger announced

on Apr 9, 2015
Updated: Oct 21, 2019

Royal Dutch Shell Plc (LON:RDSA) yesterday suffered from investor scepticism over its intention to purchase its smaller London-listed rival BG Group Plc (LON:BG) for £47 billion, which is a 50 percent premium to BG’s last market valuation before the talks were made public. The oil major, however, was adamant about the underlying value its peer, voicing confidence that the acquisition is in the best interest of its shareholders’.

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Shell’s A shares dropped 5.32 percent to 1,982.50p on Wednesday, while its B shares were down 4.18 percent at 2,116.24p. Meanwhile, BG Group’s stock surged to near its sale value, adding 38 percent by the end of the session to 1,256.58p. The benchmark FTSE 100 index closed the session at a 0.35 percent loss.
Shell said that the proposal had been developed over several months, following a longerperiod of consideration.. The oil major is offering 0.4454 Shell B shares and 383p in cash per BG share, valuing the group at 1350p per share, whereas BG’s close on Tuesday was 910.40p. Shell is planning to fund the purchase of BG with new debt, the company expressed confidence that it will not have trouble securing an attractive deal on capital markets. The only other potential drawback for Shell shareholders is that the merger will dilute existing interests, as BG shareholders would own 19 percent of the combined company, and may impede upon the company’s dividend payments, analysts have pointed out.
The benefits, however, are significant. Shell projects annual synergies of at least about $2.5 billion, with mildly accretive effects to earnings in 2017 and strongly accretive by 2018.
The two companies pointed out that they have overlapping operations in 15 countries, presenting potential for significant cost-saving and synergies. Shell praised BG Group’s strong LNG portfolio, saying that it would reinforce RDS’ position as leader in the LNG industry. The Anglo-Dutch company also commended BG’s deep water operations in Brazil, one of the key oil provinces to which Shell was “insufficiently exposed”.
“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,” Shell chief executive Ben van Beurden commented. “We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios.”
The two companies expect to conclude the deal in early 2016, subsequent to regulatory approval in Australia, China, Brazil and the EU, with no issues expected in that regard.. The combined entity is first planned to undergo an extensive $30 billion consolidation programme which will see the offloading of unprofitable and non-core assets. From 2017 a $25 billion share buyback programme will commence, and will continue for an expected three years.
Shell shrugged off concerns relating to the volatile oil price, saying that regardless of oil prices, the two companies are better off together.
“The result [of the merger] will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world,” Shell chairman Jorma Ollila concluded.
Despite Shell’s stance, analysts expect difficulties for the combined company, should oil prices not trace back to at least $70 per barrel by 2017. At any rate, experts agreed that the deal, the first major energy industry merger in more than a decade, is a gamble.
As of 07:48 BST, Thursday, 09 April, Royal Dutch Shell Plc ‘A’ share price is 1,982.50p.


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