Of all the takeover rumours that constantly ride the City merry-go-round, the idea that Royal Dutch Shell would one day buy BG has to be one of the most persistent.
And now it’s no longer a rumour.
Shell is buying BG for the equivalent of £13.50 a share. That’s roughly 50% over and above the prevailing share price before the news came out.
That’s great news if you’re a relatively recent BG shareholder, clearly. What the rest of us want to know now is – who’s next?
This is one of the biggest deals ever
Shell is paying £3.83 a share in cash for BG, plus just under half a Shell share. That’s about £13.50 per share. That’s a lot higher than the pre-bid share price. But to be fair, BG’s share price has fallen a lot in the past year, and it’s still significantly below the all-time high of around £15.64.
On another interesting point, James Mackintosh notes in his FT column that the Shell BG deal is the ninth-biggest merger deal ever. That’s not good company to keep – five of the top ten were tech-bubble era deals, and three came just before the Lehman Brothers bust. In other words, this sort of scale of deal tends to happen before crashes.
However, while I’d agree that shares in general are overvalued, it’s hard to make the case that this specific instance is about chief executive ego gone mad. Instead, it looks Shell is taking advantage of the plunging oil price to make a move.
Why is Shell buying BG? If there’s one thing an oil and gas company needs, it’s a plentiful source of oil and gas for the future. And the simple answer is that, right now, it’s easier and cheaper to buy BG than for Shell to find more of its own reserves.
The BG deal will increase Shell’s oil and gas reserves by around 25%. And it’ll boost production by 20%. According to the FT, by 2018, Shell could be producing more oil and gas than ExxonMobil – currently the biggest non-state producer. It’s already the global leader in liquefied natural gas, and this deal will cement that.
That’s good news for Shell. By comparison to some of the other big players, Shell has had problems replacing the reserves it has already pumped out.
BG directors have recommended the deal, and it’s likely to be completed by early 2016. If you own BG, it’s probably worth hanging on for now at least – you never know, someone else might fancy coming in with a higher bid.
As for the rest of the sector, the big question now has to be – who’s next?
We’re going to see a wave of mergers in the oil sector
As Charles Whall of Investec’s global energy fund put it, ”Given the industry’s lack of exploration success over the last two-three years, inorganic reserve replacement is absolutely crucial to sustaining these companies.”
In other words, expect more mergers and takeovers. ExxonMobil has already mentioned that it’s open to the idea of doing deals. And Bob Dudley at BP noted that he expected the oil price environment to remain similar to the 1980s, which is when many of the mega-mergers that shaped today’s oil giants took place.
The other point to remember is that chief executives are just like everyone else. They see action and they start to panic – they want to be part of it. Their shareholders will be asking why they’re not doing deals too. Fee-hungry bankers will be putting ideas in their heads. Their own egos will look enviously on the praise being heaped on Shell boss Ben van Beurden by an excitable press.
As the BG deal shows, pretty much no one is safe. Even a big player like BP has frequently been cited as a possible target – you have to imagine that someone out there is running the slide rule over it.
And elsewhere in the sector, all those funds out there with money to spend on ‘distressed’ assets will now be looking to act before someone else does. The last thing they want is takeover fever driving up prices and leaving them stranded.
So regardless of what happens to the oil price – and with Iran coming back online potentially, we could be looking at a suppressed price for quite some time – it looks like share prices in the sector are set to benefit from a wave of speculation.
We looked at the oil sector, and flagged up some potential ways to play a merger boom, in a recent issue of MoneyWeek magazine. Subscribers can read the piece here – and if you’re not already a subscriber, sign up to get your first four issues free here.• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.