Shell’s $70 Billion BG Deal Meets Shareholder Skepticism

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The biggest deal in Royal Dutch Shell Plc’s history failed to win over many investors who worry the $70 billion price tag is too high and could imperil their dividend.

While the cash-and-shares purchase of BG Group Plc will make Europe’s largest oil company the preeminent player in global natural gas and add enormous fields in Brazil, it’s not expected to boost earnings per share until 2017 and relies on a quick rebound in crude to about $90 a barrel to ensure success.

The shares being used to buy BG fell the most since 2008 on Wednesday even as Shell Chief Executive Officer Ben van Beurden sought to woo investors by promising cost savings of $2.5 billion and a $25 billion stock buyback.

“To assume that Shell can pay a 50 percent premium for BG, and extract significant synergies, deliver value for shareholders and maintain a dividend on an expanded shareholder base would require a more-than-healthy degree of optimism,” said Michael Hulme, commodities fund manager at Carmignac Gestion SA.

Shell’s dividend, which accounts for about 10 percent of the total payout to U.K. equity investors, is a particular concern, according to Henderson Global Investors, which owns Shell shares.

“Shell is taking on more risk and is issuing more shares and also paying out cash to BG shareholders,” Matthew Beesley, Henderson’s global head of equities, said in a note. “And this potentially puts some strain on the dividend as they redirect cash flows to paying down debt ahead of growing the dividend.”

Dilute Earnings

The deal will dilute earnings per share by 7.1 percent in 2016, according research from Bloomberg Intelligence, which said the rationale for the merger depended on a rebound in oil prices. The management’s forecast of cash flow for the combined company was based on oil averaging $90 a barrel in 2018.

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, is betting liquefied natural gas will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.

The acquisition will make Shell the dominant global LNG company, and gas is a “very important” component of the deal, he said.

Deep Water

Buying BG also brings Shell, based in The Hague, a share in Brazil’s largest deep-water fields, consolidates its position in Australia’s gas industry and allows more participation in the U.S.’s emergence as an LNG exporter.

Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That was equal to about 1,367 pence a share based on prices before the deal was announced. That valued BG at about 47 billion pounds and offered a premium of about 50 percent on BG’s pre-deal price.

Shell’s B shares dropped 8.6 percent in London on Wednesday, the biggest decline since 2008.

While a slump of more than 5 percent in benchmark crude prices led other stocks in the industry to decline, Shell led losses among producers worth more than $50 billion, according to data compiled by Bloomberg. Exxon Mobil Corp., the second-biggest loser in the group, fell 2 percent.

Shell stock traded little changed on Thursday at 2,022 pence.

Shell management met investors on Wednesday to persuade them that the long-term benefits of the deal outweighed the immediate financial burden and some fund managers were receptive.

Dividend Policy

“It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell,” said Michael Clark, portfolio manager at the Fidelity MoneyBuilder Dividend Fund. “There is no danger that Shell will change its dividend policy.”

Shell snaring BG disrupts the prevailing view among analysts and bankers who had expected merger activity in the industry to remain quiescent until later this year or even 2016.

The tie-up could presage a repetition of the wave of deals a decade-and-a-half ago that rocked the oil patch and created today’s so-called supermajors through deals that saw BP Plc buy Amoco Corp. and the creation of Exxon.

Shell was advised by Bank of America Merrill Lynch and BG worked with Goldman Sachs Group Inc. and Robey Warshaw LLP.

Break Fee

The agreement includes a break fee of 750 million pounds and the deal is expected to complete in early 2016.

The combination will form an LNG giant with sales of about 50 million tons by the end of this decade, Shell Chief Financial Officer Simon Henry said. That would make it twice as big as its closest rival Exxon.

The scope of the deal means Shell will require antitrust approvals from regulatory agencies in Australia, China, Brazil and the European Union.

“We will need their support,” Henry said. “It’s difficult to say now if we expect any issues.”

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