Shell Will Buy BG Group for $70 Billion, Creating LNG Giant

Deepsea Metro I, a sixth generation drillship contracted by BG Group to drill offshore Tanzania. Photo: BG Group

By Javier Blas and Rakteem Katakey

(Bloomberg) — Royal Dutch Shell Plc agreed to buy BG Group Plc for about 47 billion pounds ($70 billion), making Europe’s largest oil company the pre-eminent player in global natural gas and adding world-class fields in Brazil.

The deal, the industry’s biggest in at least a decade, will push Shell further into producing, shipping and selling gas as the company bets China and other emerging economies switch from coal and oil to cut pollution.

Despite the strategic vision, investors were skeptical of the stock and cash acquisition, which isn’t expected to boost earnings per share until 2017. The price of the class of share being used to buy BG fell the most since 2008 on concern the company is overpaying.

“To assume that Shell can pay a 50 percent premium for BG, and extract significant synergies, deliver value for shareholders and maintain a dividend on an expanded shareholder base would require a more-than-healthy degree of optimism,” said Michael Hulme, commodities fund manager at Carmignac Gestion SA.

The merged company, led by Shell Chief Executive Officer Ben van Beurden, 56, will boast a market value twice the size of BP Plc and surpass Chevron Corp. Shell, struggling to rebound from its worst production performance in 17 years, will swell its oil and natural gas reserves by 28 percent with the combination and inherit a management team that carved out a unique niche in liquefied natural gas, or LNG.

LNG Pioneer

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.

The new company will be the largest producer of LNG among international oil companies and gas is a “very important” component of the deal, he said.

Buying BG also brings Shell a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allow more participation in the U.S.’s emergence as a LNG exporter.

Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That’s equal to about 1,367 pence a share, valuing BG at about 47 billion pounds, a premium of about 50 percent on BG’s closing share price yesterday.

Cost Savings

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant share buyback of $25 billion from 2017 to 2020.

Shell’s B shares, the class of stock being used to finance the deal, fell as much as 8.7 percent in London, the biggest intraday decline since 2008. The A shares dropped 5 percent.

BG shares rose as much as 43 percent to 1,300 pence.

Shell snaring BG disrupts the prevailing view among analysts and bankers who had expected merger activity in the industry to remain quiescent until later this year or even 2016.

The tie-up could presage a repetition of the wave of deals a decade-and-a-half ago that rocked the oil patch and created today’s so-called supermajors through deals that saw BP Plc buy Amoco Corp. and the creation of Exxon Mobil Corp.

Shell was advised by Bank of America Merrill Lynch and BG worked with Goldman Sachs Group Inc. and Robey Warshaw LLP.

Antitrust Approvals

The agreement includes a break fee of 750 million pounds and the deal is expected to complete in early 2016.

The new company will be the world’s biggest international LNG company with sales of about 50 million tons by the end of this decade, Shell Chief Financial Officer Simon Henry said. That would make it twice as big as its closest rival Exxon.

The size of the combination means Shell will require antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.

“We will need their support,” Henry said. “It’s difficult to say now if we expect any issues.”

Oil Tanker

BG was forged from the exploration arm of the U.K.’s former state-owned gas monopoly, British Gas, that was privatized by Margaret Thatcher in the 1980s.

The company was led for more than a decade by Frank Chapman, who built a global LNG business and drilled wells from Kazakhstan to Brazil. The company’s market value rose more than fivefold during his tenure, outperforming larger rivals including Shell and BP.

Chapman retired at the end of 2012 and his successor Chris Finlayson lasted little more than a year, resigning in early 2014 after profit warnings and disagreements with the board over strategy. He was replaced by Helge Lund, poached from Norway’s state oil producer Statoil ASA, who BG made the most highly paid oil executive in Europe to win his services.

He’s now agreed to the company’s sale just two months after taking the helm. Lund, 52, will leave the company once the deal’s completed, handing him about $43 million for a year’s work.

–With assistance from Aaron Kirchfeld in London, Bradley Olson in Houston and Joe Carroll in Chicago.