BG investors should approve the Shell takeover even as the oil price languishes

By Joanne Hart for The Mail on Sunday: 24 JAN 2016

It is crunch time for investors in BG Group. Last April, it unveiled a recommended £47billion takeover by Royal Dutch Shell. This week, more than nine months later, both firms are asking shareholders to approve the deal.

It has been an eventful gestation period. The oil price has virtually halved and Shell shares have moved in tandem, sliding from 2208p to 1388p.

The slump is important because the Shell offer is a mix of cash and stock – 383p in cash and 0.4454 Shell B shares for every BG share.

In April, this was worth 1350p. Today, the offer is worth 1001p. Normally, the price of a company about to be taken over would be almost exactly in line with the offer price.

On Friday the gap began to narrow and BG closed 2 per cent below the current value of the offer at 980¼p.

The lower the Shell share price, the more expensive this transaction is on a pro-rata basis and some investors believe the Anglo-Dutch company should walk away. However, most large shareholders own both Shell and BG stock and are likely to support the deal.

For BG’s shareholders, hundreds of thousands of whom have held the stock since British Gas was privatised 30 years ago, there are now six possible courses of action.

They can reject the offer; accept it as is; ask entirely for cash; ask entirely for shares; ask for Shell A shares rather than Shell B shares; or opt out of the Shell nominee service.

It is hardly surprising that many investors find this plethora of choices confusing.

First, they should accept the offer. If the transaction falls through, BG shares will tumble and, though the company is perfectly able to carry on alone, it will certainly benefit from joining forces with Shell.

Shareholders should also accept the cash and B shares mix. Shell shares have been hit hard, so investors opting for cash would be selling out at or near the bottom – rarely the best time to exit.

Opting entirely for new Shell shares would indicate serious optimism about oil markets, while the cash and stock combination seems an effective compromise.

The B shares are also the most tax efficient for UK shareholders and the nominee service is the simplest option for all investors with access to the internet.

Midas verdict: Midas recommended BG shares in October 2006, when the price was 665p. Investors have gained more than 60 per cent since then, including dividend payments, although the stock has waxed and waned in the intervening years, in line with the oil price.

It would be much lower than 980¼p today, without Shell’s support, so investors should definitely accept the offer.