Shell poised to secure support of shareholder advisory group ISS for BG takeover; CFO says deal could withstand USD 50 per barrel for two years
Royal Dutch Shell [LON:RDSB] is poised to secure the support of shareholder advisory group Institutional Shareholder Services (ISS) for its takeover of rival FTSE-100 energy company BG Group [LON:BG], the Financial Times reported. The newspaper cited people familiar with the situation who said it is expected that ISS will recommend that shareholders vote in favour of Shell’s GBP 36bn (EUR 48.38bn) takeover bid for BG Group.
Shell is set to gain the backing of most of its own shareholders for the BG deal despite concerns that the Anglo-Dutch oil company is overpaying for BG in light of the slump in the price of crude oil, the item said.
Senior executives at Shell are meeting key shareholders ahead of votes on the deal by both sets of shareholders later in January, according to the newspaper. The deal needs the votes of a majority of shareholders at Shell and 75% at BG to proceed, the article explained.
The report quoted a top ten shareholder in Shell and BG who said they were in favour of the BG deal as it would create a world-leading company with a dominant share of the liquefied natural gas (LNG) market.
Another shareholder with positions in both BG and Shell, Aberdeen Asset Management (AAM), added that it believes the deal has a strategic logic. AAM fund manager Ben Ritchie conceded that the financial basis of the deal are not as attractive now as they were when the deal was made public in April 2015, but said the long-term price is the key issue. AAM supports the deal, the item said.
One Shell shareholder quoted in the article said the evidence indicates that the Anglo-Dutch group is overpaying. The shareholder added that they might vote against the deal. Although the shareholder conceded that the deal makes sense over the long term, they argued that Shell could have paid less.
Another large Shell shareholder warned that they may cast their vote against the takeover. The shareholder urged Shell to renegotiate the deal, the item said.
However, more Shell investors seem set to vote in favour of the deal, having bought Shell CEO Ben van Beurden's argument that the deal can deliver returns based on a long term crude oil price of of the low USD 60s per barrel, the report said. The article noted that the price of Brent crude fell to the lowest in 11 years yesterday, 7 January, at less than USD 33 per barrel.
Separately, a Reuters report on 7 January cited sources with knowledge of Shell's meetings with analysts and investors, who said Shell's chief finance officer Simon Henry informed analysts that the company's calculations have shown that the BG deal could withstand crude prices of USD 50 over the next couple of years.
Shell had initially said the deal would be profitable based on crude oil prices in the mid USD 70s per barrel. The company in December revised that figure down to the low USD 60s per barrel based on new cost efficiencies and synergies, the item noted.
A spokesperson for Shell confirmed that the company had held meetings with leading shareholders but declined to comment on the matters that were discussed, the report said.
BG Group's market capitalisation stood at GBP 32.02bn at the close of trading in London yesterday
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FT : Royal Dutch Shell set to secure investor approval for BG takeover :
Royal Dutch Shell’s £36bn bid for rival BG Group is poised to win the support of most of the Anglo-Dutch oil giant’s shareholders, paving the way for its completion despite a collapse in crude that has stoked fears the company is paying too much.
In a significant intervention, Institutional Shareholder Services, a proxy advisory body, is expected to recommend that investors support the deal, according to people familiar with the situation. ISS declined to comment.
Senior Shell executives are holding a final round of meetings with big investors ahead of crucial votes by shareholders in both companies later this month. Ben van Beurden, chief executive, has sought to persuade sceptics that the deal works at lower oil prices — last month he pledged extra capital spending cuts and other savings to shore up investor support.
The cash-and-stock bid, unveiled in April, has been approved by regulatory authorities around the world, including in China. It now requires the support of a majority of Shell shareholders and 75 per cent of those at BG.
Several large Shell investors have privately voiced concerns over the economics of the proposed takeover, the biggest energy deal in more than a decade. Though few dispute the logic of an acquisition that plugs a gap in Shell’s reserves, creating a deepwater oil and liquefied natural gas giant, there is unease over the plunge in crude, which could jeopardise Shell’s ability to sustain current dividend payouts.
Indeed, Brent crude on Thursday tumbled to an 11-year low under $33 a barrel, more than 70 per cent below its $115 peak in 2014, sending Shell’s dividend yield soaring to more than 8.6 per cent — a sign of concern about future payouts. When Shell announced the bid last year, its long-term planning range for the oil price was $70 to $110.
Shares in BG, meanwhile, traded at 936.9p, or about 10 per cent below the current value of the offer, under which BG shareholders receive 0.4454 Shell B class shares and 383p cash for each of theirs. That discount in part reflects market doubts over whether the deal will go ahead.
“It’s fair to say most of the evidence points to them overpaying,” said a Shell shareholder. “There’s a decent chance we might vote against it. You can take a view on when oil prices are going to bounce . . . Over a 15 to 20-year timeframe, [Shell] are right, [the BG takeover] will work. But they certainly could have got it cheaper. As stewards of shareholders' money they have to think about that.”
Another sizeable Shell shareholder threatened to vote against the deal, saying the company should renegotiate the terms.
However, more of Shell’s investors look set to support the deal, persuaded by a strategic rationale that Mr van Beurden now argues will deliver returns at long-term oil prices in the low $60s.
“I am for the merger because it means the creation of the best company in the world with the dominant position in LNG. This is a market that will be quite challenging over the next few years. With BG, Shell will be much, much more competitive in this area,” said a top 10 shareholder in both companies.
“We think the deal makes strategic sense . . . The economics don’t look as good as they did at the start of the deal, but the question is what does the long-term price look like?” said Ben Ritchie, a fund manager at Aberdeen Asset Management, a shareholder in both Shell and BG, who backs the deal.
James Maltin, investment director at Rathbones, another shareholder in both Shell and BG, said: “It is unfortunate that the oil price has fallen since the deal was first agreed . . . But, significantly, Shell is better off with BG assets than without them. The long-term oil price is probably higher than the current price and that is what you have to think about as a long-term investor.”
Iain Armstrong, analyst at Brewin Dolphin, an investor in both companies, according to Bloomberg data, also voiced support for the deal: “It creates a real superpower in the oil industry . . . Together, they will become the Amazon of LNG.”
Richard Marwood, senior investment manager at Axa Investment Management, which holds shares in Royal Dutch Shell and BG, said: “I think this deal will go through and should go through. Putting the companies together makes sense in terms of putting Shell’s balance sheet behind BG’s assets.”
Any renegotiation of Shell’s takeover of BG would be fraught with risk. Shell would have to wait up to 12 months under UK takeover rules before making another offer.
Theepan Jothilingam, analyst at Nomura, said Simon Henry, Shell’s finance director, had made clear that renegotiating the price was “not an option without a cooling-off period, in which case there is no guarantee the BG board would accept revised terms”.