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The many reasons why Shell’s deal with BG will happen in 2016

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How idiotic would its board look if it ditched its current bride at the altar, only to see her hook up with a rival in a few months’ time?

Jim Armitage: Wednesday 23 Dec 2015

It will be the first big test of 2016: will Shell press on with its takeover of BG when the oil price is stubbornly below $40 a barrel? Today, it gave a clear “yes” by publishing its full merger documentation and posting the paperwork out to shareholders. If it was not planning to press on with the deal, it would have found some excuse why not to do so.

The documents rap out a series of reasons why the current bombed-out oil price is not relevant to the logic of integrating these two vast companies. The deal will bring so many efficiencies, Shell promises, that its hallowed dividend will be safer, bringing in more cashflow to pay into the divi pot at as low as $50 a barrel. Few people really think crude is likely to stay below that for decades to come. And, as far as the value of the combined assets goes, it can breakeven at the low $60s, Shell adds.

That’s better than the $90 a barrel that some investors have calculated the deal will need in order to work, but similar to the $60-$70 level that Standard Life’s David Cumming said was needed when he declared the deal a dud.

With this transaction, though, the industrial logic of a tie-up is not the be-all and end-all. Many other factors are at play beyond the spreadsheet calculations around various oil price scenarios.

For one, there is a battalion of cheerleaders in the City’s bonus-hungry investment banks and brokerages urging it on. These guys – and they are mostly guys – are immensely powerful in the corporate world. Few board members of companies as big as Shell would have the cojones to upset the entire City establishment by ripping up a deal of this size.

Even if walking away might give Shell some kudos among the small number of shareholders vocally opposing the deal, it would be a major loss of face for the company on the world stage. Oil companies of Shell’s size do multi-billion-dollar deals covering decades. They are long and involved negotiations requiring a huge amount of trust. Being the company famed for reneging on a takeover deal would be hugely damaging.

Finally, Shell needs to do a deal at this time of obvious consolidation in the industry. It missed the boat in the late Nineties and early Noughties when BP bought Amoco and Exxon took over Mobil. How idiotic would its board look if it ditched its current bride at the altar, only to see her hook up with a rival in a few months’ time?

My bet for 2016: this deal will happen. The City’s bonuses are safe.

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