It was in the air that in the Big Oil segment there was an acquisition in the cards, and just recently it has been confirmed by Royal Dutch Shell (LON:RDSB, Financial), one of the oil stalwarts, that its buying the UK based oil and gas exploration firm, BG Group (LON:BG, Financial) in a deal worth 47 billion pounds ($70 billion). In fact, both the firms currently in the news stated that they have reached an agreement on a cash and share offer which would offer investors a 50% premium over BG Group’s share price as on April 7. If this acquisition goes through, it would be one of the largest acquisitions in 2015 among oil companies. Let’s get into the details that have been shared by the management regarding the acquisition process.
Terms of the deal
News sources have confirmed that if this deal goes through, it would create a company of value more than 200 billion pounds ($296 billion). In fact after the deal is completed, the investors of BG Group would own approximately 19% of the combined group. Also with regard to the amount to be distributed in cash and shares for the deal to take place, Shell stated that it would provide the BG shareholders with a “mix and match” option which could vary the amounts they want to receive in cash and new Shell shares.
Following the acquisition, Shell confirmed that BG shareholders would receive higher dividends, to the tune of $1.88 per ordinary share, from just $0.14 a share that BG investors were expecting this year prior to the acquisition news hitting the limelight.
Also, the BG shareholders would stand benefitted by the share repurchase program that Shell expects to commence in 2017 of at least 2 billion pounds.
The synergies are in place
This deal will be the third largest oil and gas deal ever signed in terms of enterprise value, and will strengthen Shell’s portfolio as it will bring assets from Brazil, East Africa, Australia, Kazakhstan and Egypt –Â these regions have some of the prestigious projects in liquefied natural gas (LNG) by the BG Group which will now get merged with the oil major, Shell. In fact, Shell is already the world’s leading LNG company, and buying the BG group will make its market position firmer when it comes to the LNG business. Post the acquisition, Shell would get BG’s capacity in LNG logistics that could aid in creating a huge gap with its immediate rivals.
Shell’s management has commented that this acquisition would aid in boosting its proven oil and gas reserves by 25%. Shell CEO Ben Van Beurden quoted, “We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with… We have two very strong portfolios combining globally in deep water and integrated gas.”
If BG’s market capitalization that currently stands at $46 billion were to merge with that of Shell that stands at $202 billion, the combined entity can surely stand out to challenge the market leader in oil and gas sector, Exxon Mobil (XOM, Financial) that is the world’s largest energy company by market value of worth $360 billion.
This deal will generate pretax synergies of around 2.5 billion pounds per year and lead to cost savings for both the participating companies. And this acquisition seems to be in sync with Shell’s announcement in January this year of cutting spending by nearly 10 billion pounds over the next three years.
Final word
Shell, indeed, has a great track record in offshore oil and gas fields, and this buyout of the BG Group would help in maintaining its lead position in the years to come. Though the acquisition cost looks high at around $70 billion, the takeover of rival BG Group will provide Shell an edge over its competitors in the LNG space. So, let’s stay tuned and keep watching the acquisition that’s in its early stages.
