Shell-BG Merger Awaits Shareholders Approval, Looks Shaky

Royal Dutch Shell and BG Group say their shareholders will vote in late January on the companies’ merger, even though the proposed deal, announced in April, is looking increasingly shaky.

The two companies said Monday that Shell shareholders will vote Jan. 27 and BG shareholders will vote the next day, the final step in the Anglo-Dutch company’s offer to buy out its smaller British rival that would create the global leader in trading liquefied natural gas (LNG).

If both sides approve the deal, it would take about 10 business days for BG’s shares to be delisted and absorbed into Shell, so the merger is expected be complete sometime in mid-February. But there are questions whether the transaction actually will go through.

When the proposed merger was announced in April it was valued at just under $70 billion, one of the biggest deals involving two energy companies in a decade. Shell was seen as a giant that could afford to wait out what was at the time seen as only a temporary depression in oil prices, and was big enough to absorb companies such as BG that weren’t big enough to avoid losing money.

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In fact, by merging with BG, Shell was seen as streamlining its own operations by eliminating redundant spending. At the time, the deal was seen as a harbinger of additional mergers in which strong companies remained strong in the face of low energy prices by consolidating the fossil fuel industry.

Since then, though, a rash of similar mergers simply hasn’t materialized. Further, Shell’s move doesn’t look so smart, as the value of its offer to buy BG has fallen from $69.6 billion in April to about $53 billion today.

Credit Suisse, the multinational financial services company, still thinks the merger was a sound decision by Shell because it minimizes the energy giant’s risk and makes it a more efficient company by eliminating spending redundancies.

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But there’s concern even among some Shell shareholders, is that Shell offered too much to acquire BG. The average global price of oil has fallen from more than $110 per barrel in the early summer of 2014 to below $40 per barrel today. Shell’s offer of nearly $70 billion to buy BG in April was predicated on the assumption that the price of oil would rebound to about $90 per barrel by the end of the decade.

As a result, with oil prices so persistently low, the merger simply won’t work out as well as originally expected, according to David Cumming, the director of equities at Standard Life Investments, the global financial services company based in Edinburgh, Scotland.

Cumming says the companies’ shareholders should reject the merger. If not, then he says Shell should scrap the deal consider itself lucky by spending only $750 million as a penalty for unilaterally withdrawing its offer to buy BG.

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Another concern is that Shell announced earlier this month that it will need to cut 2,800 more jobs if the merger closes. It said earlier this year that it would need to lay off 7,500 employees to convince skeptical shareholders of the validity of the merger.

And more job cuts appear to be forthcoming, at least among employees of BG. Shell said it may close BG’s headquarters in Reading once a merger is complete as part of a plan to consolidate operations “where practical.”

“With regards to office footprint rationalization in the UK, Shell will, following deal completion, undertake a comprehensive review during the course of 2016,” a Shell statement said.

By Andy Tully of Oilprice.com

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