DEAL REPORTER
Royal Dutch Shell’s [LON:RDSA] cash and share offer for BG Group [LON:BG] is seen as a good move strategically for the Anglo-Dutch group, according to three minority Shell investors and two cross shareholders. But the success of the deal will only be determined some five years down the line, as it is dependent on oil prices rebounding from their current low levels, two cautioned.
Yesterday, 8 April, the two sides announced a recommended offer for BG, whose shareholders will receive 383 pence in cash and 0.4454 Shell B shares. The offer is at a 52% premium to the 90-day volume weighted average price of BG shares.
The combination will benefit both BG which will be part of a bigger company and Shell, as it will increase its exposure to LNG and deepwater, according to the investors.
Shell appears to have overpaid by 10% but the deal should look good in five years’ time, according to Will Riley, co-manager of the Guinness Global Energy Fund, which has around USD 10m invested in Shell.
“As owners of Shell’s equity, we want deals done with a reasonable margin of safety; arguably, this margin is smaller than we would like," he said. Riley added that he was in favour of the deal, however.
In yesterday’s announcement Shell said that the per share impacts of the deal assumed Brent oil prices of USD 67 per barrel in 2016, USD 75 per barrel in 2017 and USD 90 per barrel for 2018-2020 (all on a 2014 real terms basis). Brent crude is currently trading at around USD 57 per barrel.
If Shell is right about the oil price rebounding to USD 90 per barrel then the deal makes sense, said a second investor.
A third investor was broadly supportive of the transaction but said it is impossible to tell if Shell is overpaying until several years down the line. If the price of oil stays at between USD 40-USD 60 per barrel for the next five years then Shell will have overpaid, this investor said.
As the takeover is a Class 1 transaction under UK listing rules, Shell investors will need to vote on the deal.
Guinness’s Riley said he expects a USD 70-USD 80 range recovery in the next 12-18 months, with some upward pressure after that.
The premium only looks significant compared to BG’s recent trading price, noted a sector banker. BG’s shares were trading at 890.4 pence the day before the deal was announced, but for most of the past year they were trading above 1000 pence.
“If we look at the theoretic value of the offer, it is a bit below what we had considered to be fair value….but this is a good deal for BG shareholders," said Yohan Salleron, a fund manager for Mandarine Valeur who has 5% of his fund invested in Shell and 2.5% in BG.
The manager considers BG Group’s fair value to be 1380 pence at the middle of the cycle.
The split of cash and shares was welcomed by the fourth shareholder who holds stock in both companies. This investor said he was happy with a larger proportion of shares than cash.
Shell is offering BG shareholders a ‘mix and match’ facility, under which BG shareholders may elect to vary the proportion of new Shell shares and cash received.
But a minority BG shareholder said he would have preferred an all-cash bid, as he does not want to hold Shell shares since he works for a small fund that does not want to be a "tiny fish" among Shell's shareholders.
Shell’s commitment to its dividend was welcomed by two of the Shell-only investors. In yesterday’s announcement the oil company confirmed its intention to pay dividends of USD 1.88 per ordinary share in 2015 and at least the same amount in 2016, and stated that dividends would be a priority for the combined group’s cash.
The acquisition is a long-term bet on deepwater offshore Brazil and LNG trading, two of Shell’s core competencies, noted the Guinness fund manager.
Acquiring assets such as BG’s Brazilian assets will come at a price, according to the second shareholder. BG has positions in five large pre-salt discoveries in the Santo Basin delivering an estimated 2.6mm barrels of oil per day equivalent of gross capacity. BG is also the operator of 10 blocks in the Barreirinhas Basin.
"Shell's growth in production is declining, but this deal gives it BG's oil fields in Brazil that we project have an extraction cost of USD 60 a barrel," said Salleron, who also considered the push in LNG to be a positive transformation for Shell.