Shell for BG Group (BG/ LN)Key takeaways from expert meeting. A bump to terms is likely.
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We held an expert meeting today to discuss the Shell /BG potential merger. My understanding of key takeaways follows:
Shell’s Chairman initiated the transaction and it was a chairman to chairman discussion which seems not to have included BG’s CEO until the deal was agreed. Little is known as to the future of Simon Lowth and Helge Lund post-merger. Losing them would be a blow to Shell/BG.
BG has been very successful at exploration but it is one thing to find oil (Deep water) it is another to bring it out. BG has world class engineering challenges that would be best met as part of a larger company.
However Shell is trying to get BG on the cheap. It would be surprising if the deal closed on the announced terms. The announcement seems to have been rushed and Shell is likely to find more synergies. A bump is likely.
A counter bid may have a low probability but in the West Exxon and Chevron could have the most to gain. A joint bid even, while not straight-forward, is possible. Chinese bidders (China is one of the largest producers in the North Sea) may wait for the UK election and test politicians support before any approach.
The stock for stock transaction (with little cash) serves to protect against oil price volatility because the cashflow metrics for the companies would move in tandem but an oil price increase would favour BG over Shell. As the oil price environment has declined BG has been writing down assets faster than Shell. In a reversal of fortunes one would expect BG to be writing up assets at a greater rate than Shell suggesting a re-rating.
Failing a counter or an improvement to terms, timing to completion seems to be the key risk.
There are no fundamental antitrust problems but timing to receive approvals may be an issue. Australia has the largest overlaps but the US is likely to be the most vocal as US competitors will want to ensure as many asset disposals as possible. China is unknown, and they could take their time to review or retaliate if blocked from bidding.
Brazil is more a change of operating licence than antitrust. The government is unlikely to oppose, as they want the asset to start producing. Once the assets in Brazil are up and running the government could change the economic agreements and increase the demand for royalty payments. If due to antitrust reviews, the timetable slips.
A delay to completion 3 or even 6 months could ensue because Shell has to issue a prospectus –audited- and the preparation can rapidly fall behind due to accounting checks. The SEC may also need to review documentation adding to pressures on timing.