It has been announced this morning that Royal Dutch Shell (LSE: RDSB) has reached an agreement to buy smaller peer BG (LSE: BG) in a deal valued at £47bn.
This deal is being touted as the first ‘super merger’ of 2015 and is the first big merger between energy companies in a decade — it will be Shell’s biggest deal ever!
Shell is offering 383p per share in cash and 0.4454 Shell B shares for each BG share, valuing BG at approximately 1,367p per share based on Shell’s closing price on 7 April 2015. That’s a premium of 50% to BG’s closing price on 7 April 2015.
The merger will increase Shell’s oil and gas reserves by 25% and will boost the company’s production by 20% based on BG’s 2014 production figures. What’s more, Shell’s analysts believe that the merger will generate pre‑tax synergies of approximately $2.5bn per annum.
As part of the deal, Shell announced today that the company expects to commence a share buyback programme in 2017 of at least $25bn for the period 2017 to 2020. This buyback is designed to offset the shares issued under Shell’s scrip dividend programme, and to significantly reduce the equity issued in connection with the BG tie-up.
Commenting on the combination, Shell CEO Ben van Beurden said:
“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. Furthermore, the addition of BG’s competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.”
A good deal?
At first glance, Shell’s acquisition of BG seems to make sense. Indeed, the tie-up will allow Shell to boost production by 20%, increase reserves by 25% and the company’s LNG production will surge.
However, BG has run into plenty of trouble over the past few years. For example, the company has recently been unable to fulfil its export commitments of liquefied natural gas from Egypt because the Egyptian government has taken too much gas for domestic consumption. Moreover, the group is heavily committed to developing oil fields in Brazil where the state oil company, Petrobras, is deeply embroiled in a corruption scandal.
For 2014, BG reported a $1.1bn loss due to write-offs driven by lower oil and gas prices. In addition, during February of this year the group warned that further write-downs totalling $9bn are on the way.
So, BG has had its fair share of troubles. Nevertheless, it seems as if Shell is willing to pay a hefty premium to get its hands on BG’s LNG assets, a business Shell’s management clearly wants to bolster.
If Shell can return BG’s business to growth, the merger makes sense. But if BG continues to rack up losses, the deal could be a thorn in Shell’s side for decades to come.