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11 October 2015 |
Royal Dutch Shell has agreed to purchase BG Group for approximately $70 billion. The deal will provide Shell with a larger share of the natural gas market, as they will acquire a number of large natural gas fields in regions such as Brazil.
The deal was financed by a mixture of cash and equity. BG Group shareholders are entitled to 383 pence in cash and 0.4454 Shell 'B' shares in exchange for every one of their BG group shares. Based on a 90 day average of the prices of the shares of both companies preceding the date the deal was announced, this represented a 52% premium* to market value.
The management of Shell has taken the view that emerging economies, most notably China, will shift their favoured energy sources from oil and coal to cleaner sources such as natural gas in light of increasing concerns for the environment. Competitor Exxon Mobil has also supported this view by predicting that trade in liquefied natural gas (LNG) will likely more than triple by the year 2040 to 100 billion cubic feet a day. This will provide an opportunity for Shell to supply natural gas in the long term, which is why Shell is currently positioning itself now to be able to benefit in the future.
It is also believed that the deal will yield synergies**, and that the assets acquired from BG group will help Shell improve its replacement ratio (this is a measure of the amount of oil and gas fields that Shell has available to replace ones that are being depleted). A strong replacement ratio means that Shell will be able to continue to produce for a significant amount of time. In relation to synergies, executives of both companies suggested that going forward the group will have two strategic growth businesses: deep water oil and integrated gas. It was suggested that these businesses could each generate $15 - $20 billion of cash flow a year.
Please note that this deal is contingent on approvals from regulators in Europe, China, Brazil and Australia, and from the shareholders of both companies.
Shell was given financial advice by Bank of America Merril Lynch. Shell was given legal advice by Slaughter & May (English law firm), Cravath, Swaine & Moore (US law firm) and De Brauw Blackstone Westbroek (Dutch law firm).
BG group was advised by Investment Banks Goldman Sachs and Robey Warshaw LLP and law firm Freshields Bruckhaus Deringer.
Any amount paid for shares that is over and above the current market value.
Synergies occur when two or more entities come together to create value that is greater than the combined value of the separate businesses. This is because the combined resources of multiple businesses can be complementary / more effectively utilised.