Shareholder green light expected for Shell BG merger

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MARTIN FLANAGAN: Monday 25 January 2016

Major investors are expected to back Shell’s troubled £36 billion takeover of rival BG Group this week despite reservations that the plunging oil price has made the deal less attractive than when first unveiled last year.

David Cumming, head of equities at Edinburgh-based Standard Life Investments, has been one of the most high-profile opponents of the merger, calling it “value destructive for Shell shareholders”.

Some other institutional investors also have concerns about the terms of the deal in the current depressed climate for the oil industry, and it is thought the Shell shareholder vote on Wednesday and BG vote on Thursday could be close.

Paul Mumford, senior investment manager at Cavendish Asset Management, which has a small holding in Shell, said: “I will vote against the deal, but more as a matter or principle than major strategic difference.

“It is not that the deal doesn’t make sense. But it was negotiated some time ago when the price of oil was much higher. I think a number of shareholders would have liked some element of renegotiation (of the terms) rather than it just going through on the nod.

“Strategically it makes sense because big oil majors like Shell and BP have to replace their reserves and BG helps Shell do that in areas like Brazil. But shareholders are also aware that had it been negotiated today the terms would have been very different.”

The City expects that enough institutions still back the strategic rationale for the takeover to get it across the line.

Last April Shell’s cash-and-shares offer was worth 1,350p a share – a 50 per cent premium to BG’s shares price at the time. But both companies’ shares have fallen heavily since then as the oil price has dropped from $65 at that time to as low as $27 recently.

Even so, institutions still in favour of the tie-up include Norway’s Norges, the world’s biggest sovereign wealth fund, Old Mutual Global Investors, Aberdeen Asset Management, Axa Investment Management and Allianz Global Investors.

One institutional shareholder said: “It is true that certain deep water projects such as Brazil which were a cornerstone of the deal’s rationale might be worth less in the short to medium term because of the slump in the oil price.

“But a big plus remains from Shell’s point of view that there will be huge synergistic cost-savings from the merger. That will benefit margins and profits.

“And the very public woes of the oil price does give people an excuse to lay off people in far greater numbers than they may have been able to before.

“Also, against this price backdrop, drilling and labour costs are substantially reduced. Rigs cost less to hire. I think many shareholders will think, on balance, that it is worth supporting the takeover.”

A simple majority of Shell shareholders is needed to pass the deal. A 75 per cent majority of BG Group investors is needed 24 hours later.