When Royal Dutch Shell launched its blockbuster £47 billion (€65 billion) bid for BG, oil was changing hands on energy markets at about $60 a barrel and the price was forecast to rise to $70.
Nine months later benchmark Brent crude has slid to a seven-year low below $40 a barrel. So the value of Shell’s shares and cash offer for BG has been cut from £47 billion in April to £35 billion. So do the economics of a deal that would have created a business valued at more than £200 billion still add up?
News on Monday that the takeover had cleared its final regulatory hurdle should have marked the end of the last real obstacle to the deal. But, as the oil price slides, investors are getting nervous. David Cumming, head of equities at Standard Life Investments, is one of the few institutional investors prepared to speak.
On Monday he said the move no longer makes financial sense. In his view – and as a Top 20 shareholder in both companies, Standard Life has a serious interest in the outcome – with oil at $40, it will be “very difficult to make the deal work”.
Increasing pressure
He believes Shell will come under increasing pressure to explain how the sums stack up in the current environment. When it launched its bid, Shell’s assumptions for the price of Brent were $67 for 2016, rising to $75 in 2017 and $90 for 2018 to 2020. Those look too optimistic now.
There was more bad news yesterday as ratings agency Moody’s slashed its 2016 oil price forecast by $10 to $43 a barrel. It highlighted global oversupply and the prospect of more oil flooding onto the market with the lifting of sanctions against Iran.
By 2020, the price will have picked up to $63 for Brent, Moody’s predicts, but that is still nowhere near the $115 peak reached last year.
In an effort to allay investors’ concerns, Shell said it would axe a further 2,800 jobs from the combined group – 3 per cent of the workforce – on top of the 7,500 job cuts in the pipeline at Shell. The group reiterated its target of $3.5 billion of cost savings and said it would consolidate offices of the two companies in certain locations around the world “where practical”. There will be a “comprehensive review” of locations in the UK in 2016, the company said.
Strategic move
Shell chief executive Ben van Beurden is convinced about the merits of taking BG within Shell’s energy empire. The deal is an important strategic move for the Anglo Dutch oil major, he said on Monday, and one that will “make Shell a more profitable and resilient company in a world where oil and gas prices could remain lower for some time”.
The deal remains on course for completion next year, but investors in both companies must give their approval first, with BG requiring 75 per cent approval and Shell a straight majority of 50.1 per cent.
It is rare for deals to be voted down by investors when both boards are in agreement, particularly a deal as advanced as this. But how many times have takeovers been launched only to see the price of the primary product plunge as the transaction slowly works its way through the regulatory approval process?
As Cumming pointed out, there are a number of options: Shell could renegotiate its terms in line with the oil price slide or it could call the deal off altogether, a move that would trigger a break fee of £750 million. It’s a chunky penalty, but relatively insignificant for a company of Shell’s size.
For now, despite Cumming’s concerns, investors appear to be taking a long-term view and look minded to support the takeover. But that could all change should oil take another calamitous lurch downwards in the weeks ahead.
Fiona Walsh is business editor of theguardian.com
