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Investors brace for BG merger vote

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by Veselin ValchevTuesday, 26 Jan 2016, 08:42 GMT

Royal Dutch Shell Plc (LON:RDSA) shareholders are due to vote on the £31 billion acquisition of smaller energy rival BG Group tomorrow, and all uncertainty in regards to the vote’s success seem to have evaporated.

A slew of highly influential investors and advisers have publicly backed the merger, which opponents have slammed as “value destructive” for Shell shareholders.

The only major investor to publicly come out against the acquisition is Standard Life, which argued that the slumping oil price has eroded the appeal of the merger. However, Standard Life also noted that it would vote for the deal with its BG Group holding at the respective vote on Thursday, the day after Shell votes.

“The vote could be reasonably close but I would expect it to go through,” said Bernstein analyst Aneek Haq. “Most oil specialists support the strategic and economic rationale for the deal, so despite some investor concern it should go through.”

”Perfectly timed”

Last month, Shell said that the deal would add to cash flow even with oil at $50 per barrel, lowering its projected break-even threshold for the second time since the deal was announced in April. Oil appeared in recovery mode back then, trading at about $50 and gaining momentum.

However, prices have nearly halved since then, and the immediate economic rationale of the takeover has been all but erased.

Still, investors are betting on Shell’s assertion that the real benefit of the deal is in the long-term with the addition of high-quality reserves and assets.

“Shell keeps saying it is a merger for the long term. And it should be looked at that way,” said Niels Lammerts Van Bueren, portfolio manager at arbitrage fund Trz Trading BV, adding that the merger “looks like a done deal”.

Chris Cernich, head of special situations research at Institutional Shareholder Services (ISS), said in a Bloomberg TV interview that the deal will add to Shell’s cash flow even below $50 a barrel. “It is a shrewd if not a perfectly timed acquisition,” he said.

ISS, an influential proxy shareholder adviser, earlier this month backed the deal, saying that the recent slump in oil prices does not take away from the “strategic opportunity of a transaction whose benefits will be realized over decades”.

“There is credible evidence… that the price Shell is paying is reasonable even considering the decline in oil prices and oil stocks since the deal was announced,” ISS said. “Given the compelling strategic rationale, and the significant positive economics to be realized within a relatively short time frame, support for the transaction is warranted.”

Premium shrinks

Besides ISS, fellow proxy adviser Glass Lewis has also publicly given the deal its backing, as have fund managers at Old Mutual Global Investors, Aberdeen Asset Management, Artemis, Allianz Global Investors, Axa Investment Management, and Henderson.

Shell also received a major boost last week when the world’s biggest sovereign wealth fund, Norway’s Norges, said it would approve the takeover. The fund is BG’s second-largest shareholder and Shell’s fifth. It has been suggested that the Qatar Investment Authority, which is a major Shell shareholder, is also supportive.

Risks to the transaction appear to have almost disappeared. The premium of Shell’s offer to BG’s share price, a key indicator of investor confidence in the deal’s outlook, has shrunk to as little as 2.5 percent, the lowest to date. Shell is offering 0.4454 of its B shares plus 383p in cash for each BG share, or a total of 986p at current prices, which compares with a BG share price of 960p. The premium was as much as 12 percent last month.

Shell’s share price again opened on the downside today, dropping 3.47 percent to 1,350.00p as of 08:22 GMT. The stock has lost about 11 percent so far this year.

As of 08:44 GMT, Tuesday, 26 January, Royal Dutch Shell Plc ‘A’ share price is 1,354.50p.

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