Shell continues to buy British Gas, despite doubts

acquisition, takeover, Shell, British Gas, shareholders, investment companies, shareholders, strategy, oil price, value

Cashing in: Investment bankers and advisers will enjoy Shell’s £36billion takeover of BG Group

As the oil price remains low, major shareholders are hesitating about the proposed acquisition of British Gas by Shell.

Shell thinks, in the long term, the deal will be highly.

Investment bankers and advisers will cash in on a multi-million-pound fee bonanza from Royal Dutch Shell’s £36billion takeover of BG Group.

As mentioned in ‘this is money’, £106 million in fees will be shared by advisors including Bank of America Merrill Lynch, Goldman Sachs and Rothschild.

Distressed shareholders who are fighting against the proposed takeover of British Gas (BG), are loosing the battle. Last week, British and American investment companies openly distanced from the acquisition. Later this month, shareholders will vote on it.

$ 50 per barrel

Because of the low oil price – $ 32 last monday – Shell almost certainly will suffer considerable losses on the acquisition of the gas company. But in the longer term, Shell foresees major strategic advantages.

For this success, the price of a barrel of oil should be again 50 to $ 70, within four years. According to the Shell management, $ 50 per barrel should be enough to make a profitable acquisition.

When announcing the deal in April 2015, Shell was thinking very differently. The combined entity would be profitable at a price level of $ 70.

  • Last December, Shell announced that additional spending cuts (worth 2 billion) and a new target price of $ 60, would be enough
  • Last week, chief financial officer Simon Henry told the shareholders that – after a new stress test – the latest estimate of $ 50, would be enough
Jobs threat because of low oil prices

Jobs threat because of low oil prices

Pricing trends

Skeptical shareholders are wondering when that $ 60, could be achieved. Recent market movements do not indicate higher prices.

  • In the US, long-term contracts for 2020 and 2024, have been made for less than 50 to 54 dollars
  • Last week, Saudi Arabia announced that partial privatization of state-owned Aramco would be negotiable. Saudi Arabia appears to be preparing for a long-term oil price battle
  • At the same time, Iran is preparing for a substantial increase in production later this year. Mostly from easily accessible fields, from which the oil can be extracted for less than $ 10

Shareholders against

Last Friday, the British investment company Standard Life (1.7% Shell shares) announced that it will vote against the acquisition of British Gas. And they are not the only ones. Several other large funds agree that there is no advantage in the proposed acquisition.

  • In December 2015, the US fund Capital Group (2% shares in BG), sold more than 50% of it’s shares because they expected a fall of the value after the acquisition
  • According to David Cumming, director of Standard Life Investments, Shell should terminate the contract with BG. The fine of 1 billion euros plus previously incurred costs, would be more beneficial to the shareholder value. “We have concluded that the proposed terms of the acquisition of BG are value destructive for Shell shareholders.”

Shareholders pro

However, according to most analysts, the support for the merge is larger than the opposition. (More than 50% of the shareholders should accept the deal, both for Shell and BG. And the proponents of BG also must represent 75% of the shareholder total.)

50% support is very likely, Reuters quoted a major shareholder.

According to investment bank Credit Suisse, the deal would be profitable despite the low oil prices, because an oil/gas combination would be less risky. Shell would remain able to pay the traditionally generous dividend.

The Eumedion Foundation, which looks after the interests of (institutional) investors, considers the acquisition of British Gas by Shell as not controversial and didn’t warn it’s shareholders.


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