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$70 billion deal between Royal Dutch Shell plc and BG Group plc may be in danger

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Royal Dutch Shell-BG Group Deal: Succumbed to Pressures?

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According to various market participants, the merger does not make sense at low oil prices and so they are urging Shell to pay a termination-fee of $750 million to BG Group and walk out of the deal.

By Mushhood Khan on Dec 22, 2015

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has just entered the last stage of closing one of the biggest energy deals this year. Yesterday, the oil giant announced that BG Group would file a request for approval in the High Court, following the consent by China’s Ministry of Commerce (MOFCOM) coupled with the unanimous decision of the boards of directors. Subsequently, the energy companies will publish scheme documents for their shareholders and set up a shareholders’ meeting. The companies are expected to release documents today.

Though, Shell has received approval from all the five regulators, and is just about to complete its $70 billion merger deal with the BG Group plc (ADR) (OTCMKTS:BRGYY). Investors and analysts believe that the transaction is risky, considering how the crude environment is continuously deteriorating. Brent has dropped from $114 per barrel in June 2014 to as low as $36.16 per barrel yesterday. The global crude oil benchmark is just trading above its 11-year low at $36.47 per barrel in Asian trading hours today, while US oil, West Texas Intermediate (WTI) is trading at $36.05 per barrel.

Moreover, the market, including Goldman Sachs Group Inc., is expecting crude oil prices to decline even further in future, as the global glut in oil supply is not lessening. The sell-side firm believes that oil prices as low as $20 per barrel are required to slow down production in order to restore balance in the industry.

Though the announcement of the deal positively impacted BG Group stock price, the low crude oil prices are negatively affecting the share prices of the energy companies. Since the announcement of the deal in April, Shell has lost 30% of its value, while according to Bloomberg, the arbitrage between Shell’s offered price and BG Group’s share price increased to 12.6% yesterday. This is the sharpest decline in the company’s stock price in the past four months.

When the Anglo-Dutch energy company announced the deal, it was expecting oil prices to recover to $90 per barrel by the end of the decade. However, because of the low crude oil prices and increasing arbitrage, the value of the acquisition deal has dropped down to $53 billion. Speculations surface that a further decline may call off the deal. The London-based brokerage firm, Olivetree Financial Ltd. said that the chances of the deal closing successfully have dropped from 75% in September to 65%, now. According to various market participants, the merger does not make sense at low oil prices and so they are urging Shell to pay a termination-fee of $750 million to BG Group and walk out of the deal.

Shell and BG Group’s shareholders are expected to vote on the merger on January 27 and 28 next year. The transaction requires 50% support from Shell’s shareholders and 75% of the total value of BG Group’s share in favor of the merger. However, it is highly likely that shareholders of the companies will not vote in favor of the deal, if crude oil prices remain at low levels. Thus, the successful completion of the deal is not dependent on oil prices.

Meanwhile, Shell will not allow the deal to slip out of its hand easily. The Hague-based oil giant is expecting $3.5 billion worth of cost synergies and a strong foothold in the Brazilian offshore and Australian liquefied natural gas (LNG) market following the merger. The energy company is reviewing its stake in the New Zealand and is planning to reduce its total headcount by 3%, as it is aiming to become more resilient, lucrative and efficient after its consolidation with the BG Group.


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