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Fund management industry’s credibility on show in planned BG-Shell merger

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Screen Shot 2015-12-23 at 09.03.45By Ian McVeigh: 3:35PM GMT 02 Jan 2016

Shell bid for BG in April last year, after the oil price had halved. It is impossible to say what the price of BG would be without the bid, far lower for sure and most calculations suggest that a premium of around $20bn to $25bn is being paid to the shareholders of BG.

I am not suggesting that the board and management of Shell are thinking “I’ll be gone, you’ll be gone”.

The people at Shell take a more long-term view than those on the trading desks of the banks might take, but when you consider the CFO’s comment not to worry about the price paid, this sounds like a classic case of a deal made using other people’s money to me.

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Companies with a real eye on long-term value creation, like AB Foods or Next, keep an iron grip on the issuance of their equity.

Every corporate deal is seen as having unique merit by its participants and no one ever thinks that their deal is just a part of the great trading and transaction culture of the modern era. It is only to outsiders that this appears so.

The investment industry will show what it means by stewardship in this situation when it votes on the deal on January 27.

A friend of mine got it right when she said, ‘this is when you lot really earn your fees!’ The vote is a major opportunity for fund managers to send a powerful message to companies and particularly their advisers.

Writing recently in this space, Martin Gilbert of Aberdeen Asset Management commented on the need for the fund management industry to do a better job of stewardship. Shell/BG gives the largest (and arguably most influential) institutional investors an opportunity to illustrate how this can work in practice.

This vote is an especially big moment for the index funds that track the market by mirroring an index like the FTSE 100.

The likes of BlackRock, Vanguard, as well as L&G. L&G own roughly 4pc of the stock market through their index funds, BlackRock slightly more.

Unlike many active managers who may have as much at stake in BG as in Shell, these funds have around six times as much invested in Shell as in BG.

It seems very hard to imagine that index funds will vote for this deal as so much of the premium that is being paid is going to the company where their holdings are far smaller.

Nigel Wilson is clearly aware that this decision will be watched very carefully by savers who want to see how fund groups exercise their stewardship role in a contentious situation.

Much has been written about the degree to which fund managers risk becoming absentee owners. Index funds in particular have to engage and they do, because they don’t have the option of voting with their feet.

In most deals, investors rightly give management the benefit of the doubt, but $50bn shouldn’t be invested unless Shell is seen as having made an overwhelming case to do so.

– Ian McVeigh is head of governance at Jupiter

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