So the merger between Shell Transport and Trading and Royal Dutch something that shareholders have been calling for since Shell overstated its reserves back in January last year was meant to simplify things for the Anglo-Dutch group. On the contrary, though, the merger looks pretty darn complicated. Why? Because the company will have two different classes of stock, says Fiona Maharg-Bravo on Breakingviews.com: A' shares, which will be subject to Dutch withholding tax, and B' shares, which UK investors will prefer because it's not subject to the tax. Currently, the Dutch shares trade at a 4% discount.
Will this discount last? asks Maharg-Bravo. No, as Shell has admitted it will be buying the cheaper shares as part of its buyback programme later this year. Moreover, as non-UK investors by the stock, the gap should narrow: US and Dutch shareholders do not, for example, have the "same tax issues" which means they will simply buy the cheaper of the two.
With the merger, the group's weighting in the All Share index doubles to 7%, says Lex in the FT. This means that owning just B' shares will run the risk of "index tracking errors" which will also encourage investors to opt for A' shares, and is more reason to believe the discount will not last in the longer term.
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Yet instead of asking which of the two shares to buy, the question should perhaps be whether to choose BP shares above Shell. Shell has outperformed BP by some 15% since the reserves debacle, says Maharg-Bravo. And once the index reshuffle "settles down", the valuation gap should widen and so favour BP.
