Announcing a multibillion dollar takeover must be a hair-raising experience. Despite the months of negotiations and the small fortunes (or not so small...) paid to slick advisers at investment banks, there’s always that niggling doubt that something will scupper the deal, leaving the board with some serious egg on their faces.
Shell boss Ben van Beurden will have breathed a sigh of relief today, then, as his acquisition of BG Group got final regulatory clearance from the Chinese Ministry of Commerce (otherwise known as ‘MOFCOM’, which sounds rather too much like a Russian hat to be a respectable acronym, but that's by the by).
This means that all the regulators who could have spoiled the party have now given their blessing, and the takeover could complete early next year. But celebrations would be a little premature. There remains the little matter of receiving approval from the shareholders.
When he announced the deal in April, van Beurden said ‘bold, strategic moves shape our industry’, which sounds great, except ‘bold’ isn’t exactly the word that comes to mind after hearing ‘oil firm shareholder’ in a word association game. ‘Dividend’ on the other hand...
Last year, Shell paid something in the region of £8bn in dividends, while BG Group managed about £700m. As part of the cash and equity deal announced in April (then worth £47bn; now around £34bn), Shell shareholders will own 81% of the combined firm. A beermat, a pen and a Maths GCSE are all that’s required to see that the gain in total dividend is outweighed by the loss in share.
The £13bn in cash that the firm needs for the purchase could also cause some heads to shake, even if van Beurden insists there are significant savings to be had from ‘synergies’.
Of course, the deal was never supposed to produce immediate results. Shell was attracted by BG Group’s strong and highly complementary upstream portfolio and its presence in the promising and lucrative liquefied natural gas (LNG) sector. It also no doubt saw the oil price slump as a unique opportunity to grow by gobbling up smaller rivals struggling to survive on their own.
That’s all very well, but with the oil price down at less than $40 (£27) a barrel and Shell just making a $6bn quarterly loss on asset impairments, this is going to be hard to swallow. Convincing investors that it will all be worth it once oil rebounds to $70, $80 or $100 will be challenging at best when there are no signs that the price war between OPEC and the American frackers will be resolved any time soon.
Van Beurden will have to hope that the tendency of Shell's investors to think for the long term will outweigh their tendency to avoid risks. They certainly weren’t leaping up and down on the news in either case. Shell shares fell half a percent to £14.51, while BG Group shares rose 1.2% to 937.1p.
