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Reactions to the Shell/BG Merger

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08/04/2015
Royal Dutch Shell has announced it will purchase BG Group for £47bn, in one of the largest corporate transactions ever - what do financial experts make of the deal?

Ian Forrest of The Share Centre said the deal “was attractive for investors, especially those seeking a higher level of income.”

“The logic of the deal is clear – it would instantly turn Shell into the largest independent natural gas producer in the world with, the resources to fully exploit BG’s vast fields in East Africa, Brazil and Australia. BG has long been seen as a takeover target, while Royal Dutch Shell has been pondering its acquisition options for a while. Shell has paid very good dividends for many years, and has a significant cash pile which it can expect to see boosted further by the deal.”

“For existing BG investors seeking income this is a good offer. We retain our ‘buy’ recommendation on Shell for lower risk investors seeking income, due to the potential benefits of the deal and the boost to future dividends.”

Michael Clark of Fidelity said the acquisition could be attributed to BG “struggling to develop its assets as smoothly as hoped in recent years.” Looking ahead, Clark believed the move would “give 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.”

Clark believed the merger was “a good deal” for both BG and Dutch Shell shareholders, and “there is no danger that Shell will change its dividend policy.”

Richard Hunter of Hargreaves Lansdown said that Shell had “acted opportunistically…as it previously implied it might if the occasion arose.”

“Already the largest FTSE100 constituent by a considerable margin, this deal will further consolidate Shell’s position in that regard. There are clear attractions from Shell’s viewpoint, including its additional exposure to LNG, almost immediate cost synergies and, in due course, asset sales from a partial break up of BG’s operations.”

“The projected price being paid for BG does not quite match the company’s previous high of 1551p in March 2011, since when the shares have fallen 41%, 20% of which is in the last year alone. Nonetheless, the combined cash and shares offer will not, it would appear, dilute the cash generative abilities of the combined entity, with a substantial share buyback programme pencilled in for 2017 and beyond.”

Looking ahead, Hunter said the deal “could also prompt other companies who have been running the slide rule over potential targets to make their move.”

Pascal Menges of Lombard said the acquisition “showed that Big Oil’s growth strategy over the last ten years is bust.”

“Shell’s purchase of BG Group heralds a scrabble by big oil to improve the overall quality of their portfolios,” Menges believes. “It didn’t have to be this way. Low oil prices in the early 2000s offered a window to pick up quality reserves and production at depressed prices.  Instead they sat on their hands and waited until later in the decade to embark on pricey investments in new oil sources.”

 

While broadly welcoming of the merger, Menges believes it comes at a “hefty price”; “management will have their work cut out to execute the deal and generate synergies and assets sales.  The risk of indigestion is not small.”

As for whether this move is but the first instance of what will become a trend, Menges is sceptical. “Other oil majors would certainly like to ‘high grade’ their portfolios,” he concludes, “butonly Exxon has the flexibility to do big ticket deals like this one.  In contrast Total, ENI and Statoil will have to content themselves with the pick ‘n mix counter.”

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