Royal Dutch Shell’s (LSE: RDSB) £47bn cash-and-stock offer for BG (LSE: BG) is one of the largest takeover deals ever to take place in the UK. And it’s also one of the biggest takeover deals the oil sector has seen since the creation of the supermajors, created during the time of low oil prices in the late 1990s.
However, it seems the market believe that the deal will fall apart. Indeed, the current spread between BG’s current share price and Shell’s offer has grown to around 16%.
Merger arbitrage
Shell is offering 383p in cash plus 0.4544 Shell B shares for every BG share. At time of writing this works out at around 1,128p, although BG’s shares are only trading at 991p, a full 13.3% below the offer price.
Profiting from a deal like this is called merger arbitrage and is big business. Nonetheless, in most cases the spread between the offer and share price of the target is so small that you’d need to be a specialist to make any profit.
With a 13.3% return possible on the Shell-BG merger, this opportunity is one-of-a-kind. What’s more, as the merger is set to complete during the first quarter of next year, BG shareholders are set to receive an additional 27p per share via dividends before the deal is finalized.
Including dividend cash, the total possible profit is just under 17%.
Long-term investing
Merger arbitrage and trading isn’t usually the Foolish way but by buying into the BG-Shell deal, not only do investors stand to profit from the merger, they’ll also end up with Shell shares, which are a great addition to any portfolio.
At present levels, Shell supports a dividend yield of 7.5%, the highest yield in the FTSE 100. And for the time being, the company’s dividend payout is here to stay.
Dividend guarantee
Shell’s CEO Ben van Beurden gave a speech earlier this week at the Barclays investment conference, and he stated that Shell’s main priority is to maintain its dividend payout at present levels.
He also went on to say that the BG-Shell merger is going ahead no matter what and the deal will help strengthen Shell’s balance sheet.
Moreover, Ben van Beurden told analysts that Shell is planning for what could be a prolonged downturn of the oil price. This planning includes cuts to capital spend while maintaining a sensible and affordable investment programme, cuts to operating costs and asset sales.
With regards to new investments, Shell is implementing a rigorous appraisal process and one that allows only the very best projects to go ahead as long as they are affordable according to the prevailing environment. In addition, cost savings across existing operations have already helped the company reduce per-barrel operating costs by $10 across the group.
The bottom line
Using merger arbitrage to profit from the BG-Shell deal could yield a quick 17%. Also, long-term investors will benefit with the allocation of Shell shares received as part of the deal.