Shell’s mega-merger with BG

BG Group
Caution has merged with buccaneering

Oil and gas giant Shell is to buy rival BG Group for £47bn in cash and shares, marking the world’s biggest deal so far this year – and a 50% premium to BG’s pre-bid share price. BG shareholders will own 19% of the group, which will be the world’s second-biggest oil and gas company after Exxon Mobil.

What the commentators said

It’s no wonder rumours of a tie-up between Shell and BG have been floating around for years, said Lex in the FT. They complement each other well. Both rely on natural gas for production growth: Shell is focusing on the Asia-Pacific region in this regard, BG on the Atlantic. Both have deepwater oil reserves.

Shell will be able to add more than 25% to its “ailing 13 billion barrel reserve base” – it has only replaced 80% of the reserves it has consumed in the last three years. Its production will grow by a fifth. But Shell is paying a high price, said Lex, and is counting on $90 oil in a few years’ time to keep its promises. Whether this is plausible “is unclear”. Managers “will have their work cut out to execute the deal”, generate cost-cuts and synergies, and secure asset sales. “The risk of indigestion is not small.”

Most takeovers fail to deliver the promised gains in value, added Nick Butler in the FT, often due to cultural differences. “It will be fascinating to watch the integration of Shell’s ultra-cautious committee structure with BG’s highly personal buccaneering style.” More broadly, expect more deals now that the industry has realised low prices could persist, and restructuring is on the agenda for everyone. “The Shell deal is just the beginning.”