Shell goes big for BG deal

June 2015 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Despite the overarching uncertainty surrounding the global oil and gas industry, the deal of the year so far was announced in April when Royal Dutch Shell agreed to acquire smaller gas focused rival BG Group for $70bn. The deal, once completed, will help close the gap between Shell and market leader Exxon Mobil.

Under the terms of the deal, BG Group’s shareholders will receive a combination of cash and shares which values BG shares at 1350 pence, or around 383 pence – just under half the value of a Shell B share. According to a joint statement released by the firms, the cash and shares offer will provide investors with a 50 percent premium on BG Group’s share price on 7 April. The offer has been accepted and recommended by BG Group’s board of directors. Once the deal has competed, BG Group’s shareholders will hold around 19 percent of the newly combined company. The two firms have agreed a £750m cancellation fee should the deal collapse. The transaction is expected to take around 12 months to complete.

In a statement announcing the deal, Jorma Ollila, chairman of Shell, said: “This is an important transaction for Shell, accelerating the delivery of our strategy for shareholders. The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world. BG shareholders will receive significant value through the premium being offered for their shares. They will become shareholders in Shell, accessing an attractive dividend policy, a share in the significant synergies and the compelling upside and enhanced operating capability of the combined group. We believe that the combination is in the interests of both our companies and their shareholders.”

For Shell, the acquisition of BG Group represents a marked change in direction, toward the business of producing and selling liquefied natural gas. Overnight, the firm will also become one of the larger operators in Brazil’s offshore oil fields. To date, Shell’s exposure in this area has been relatively minimal, although it appears the company has been contemplating this deal for some time. Commenting on the merger, 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. The BG Board remains confident in BG’s long-term prospects under the leadership of Helge Lund. Shell’s offer, however, allows us to accelerate and de-risk the delivery of this value. The structure of the offer will provide BG shareholders with an attractive premium and a substantial cash return as well as enabling them, if they wish, to participate in the benefits of the combination through the share component. For these reasons, the BG Board recommends the offer.”

Should the deal go ahead it would represent the largest deal in the oil and gas space since the 1998 $117bn mega-merger of Exxon and Mobil, and BP’s 1998 acquisition of Amoco for $85.4bn.

Many analysts have suggested that the tumbling price of oil and gas over the last 12 months may prove the catalyst for a great wave of consolidation in the space. With smaller firms pressurised by rising costs and onerous debt loads, the industry’s bigger players may take the opportunity to snap up long term assets comparatively cheaply. Given the significant drop in oil prices since mid 2014, there is a multitude of smaller, weakened companies operating in the space which would make suitable acquisition targets. Though by no means a small firm, BP plc has been the target of some considerable M&A discussion in recent months, with rumours suggesting that market leader Exxon may be contemplating a takeover of fellow ‘supermajor’ BP. Bob Dudley, BP’s chief executive, has distanced his firm from any potential takeover talk; but the coming months may see a flurry of M&A activity regardless.

Richard Summerfield