BG Is a Bargain, But Shell Still Overpays

On April 8,

From a regulatory standpoint, there is some risk that a deal of this size could run into hurdles, as evidenced by BG’s shares currently trading roughly 14% below the implied price of Shell’s offer. As discussed by management, regulatory and/or antitrust approvals are needed from the EU, Brazil, China, and Australia. We expect to risk the value of this deal for each company by about 10% to reflect the chance that it is not consummated as planned.

Shell intends to significantly restructure the combined company by selling $30 billion of assets during 2016-18 and cutting capital spending compared with what each company was planning to spend on its own. Approximately $1 billion in operating synergies are also expected to be realized by combining the companies. Provided that oil prices recover and reach at least $70 per barrel in coming years, management believes it will be in a position to repurchase $25 billion of shares during 2017-20. Combined with the company’s pro forma $14 billion annual dividend, this is a significant return of capital to shareholders.

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