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China approves Shell's BG Group takeover

The Ministry of Commerce green light marks the last regulatory hurdle for the deal and clearing the way for a final shareholder vote in the coming weeks

As the final shareholder vote nears, attention will return to the deal’s lofty valuation as they re-visit the agreement much deeper into the oil downturn than when the takeover was announced in April. Brent crude has fallen to around $38 a barrel this week, down about a third from when the deal was announced in April. And there is little hope for price relief in the coming months as producers continue to pump as much oil as possible into already oversupplied markets.

This has shaken the outlook for the deal’s valuation and strategic justification. On the positive side for Shell’s shareholders, the takeover is now worth nowhere near the initial price tag of $70bn. As Shell management has been at pains to point out, the share price component of the deal in effect provides a hedge on the oil price. BG shareholders are to receive 383 pence per share plus 0.4454 of Shell’s B shares. As the value of those shares have fallen with the oil price – and ironically concerns that the company is overpaying for BG – so too has the deal’s valuation.

At Shell’s 14 December share price, the deal is worth around $52.6bn, and BG’s shareholders stand to get around 1,019 pence per share.

There is still significant doubt that the deal will receive the 75% approval from both companies’ shareholders needed to go through, though. BG’s shares were trading at around 924 pence a share, about 9% less than where the offer stands. The gap indicates that many investors still see the deal as overpriced and worry that it may ultimately be rejected when put to a shareholder vote.

Shell has tried to soothe those concerns. Alongside its announcement that Chinese regulators approved the deal, Shell said it planned to cut as many as 2,800 jobs, around 3% of the enlarged post-BG workforce in a bid to cut costs. It takes Shell’s planned layoffs to more than 10,000. The company has also upped its estimate for post-merger annual synergies from $2.5bn a year to $3.5bn, though some doubt these synergies can be realised. In November, Shell’s chief executive lowered his estimate for the newly enlarged company’s breakeven oil price to the mid $60s a barrel, down from an earlier estimate of $70/b. The company has also pointed to a planned $25bn share buyback programme and $30bn in asset sales after the merger.

Many analysts agree. “While we still retain reservations about the price of the circa $56bn BG acquisition, on completion we believe significant value can be added through divestitures, share repurchases and further cost savings and synergies,” Jason Gammel, an analyst at investment bank Jefferies, wrote in a recent research note.

Others argue that the fundamental strategic shift the deal will enable remains attractive, though it depends on an oil price recovery. “What interests us in particular is the shape of the portfolio that should eventually emerge,” argues Deutsche Bank analyst Lucas Herrmann. “A mix of well positioned deep-water assets with significant resource running room in Brazil and the Gulf of Mexico combined with an unparalleled position in structurally growing LNG markets are, in our view, major longer-term attractions.”

Taken together, the deal still looks likely to go through, even if many shareholders harbour doubts about the cost amid a deeply uncertain price outlook.

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