Royal Dutch Shells(LSE: RDSB) 47bn cash-and-stock offer forBG (LSE: BG) is one of the largest takeover deals ever to take place in the UK. However, the deal is also rapidly becoming one of the most controversial takeover deals ever to take placehere. One fund management is now openly calling for Shell to scrap its offer for BG.
Call to reject the offer
It emerged this weekend thatIan McVeigh, head of governance at Jupiter Fund Management and one of the Citys biggest fund managers, has compared theproposed takeover of BG by Shell to the disastrous purchase of ABN Amro by Royal Bank of Scotland in 2007. RBSs ill-fated takeover of ABN Amro ultimately resulted in the government bailout of RBS and years of pain for the bank.
Nevertheless, Shells management seems to be dead set on going ahead with its $70bn offer for BG. Shellschief executive has told investors that the deal would only fall through if if people stopped using energy.
Reassuring
To reassure investors that the deal does indeed make sense, Shell has hiked the dollar value of savings it expects to generate by combining with BG. An additional $1bn in savings will come from cost cutting in back office functions, marketing and shipping, which had already been expected to save $1bn a year. Further, the enlarged group will be able to save $1.5bn per annum from a cut in exploration activities, as the combined group spends less on searching for new oil fields.
Shells management had initially predicted up to $4bn in value synergies from the merger.Under City takeover rules, Shell can only set out initial operations cost reductions that will be achieved by eliminating clear duplication in the accounts, which accountants can independently verify duplications such as separate office buildings located next door to each other. The projected value synergies include benefits that cant yet be calculated.
These cost savings and synergies should ensure that the deal works with oil trading at $60 per barrel, which is the crunch point for much of the industry.
That said, the deal will only really work if Shells divestment plan to shift $30bn of non-core assets from the enlarged group goes to plan. These asset sales will allow Shell to pay off the debt resulting from the deal and help sharpen up the groups portfolio.
Buy, sell or hold?
Theres no denying that the Shell-BG merger is fraught with risks, especiallywhen you consider that the oil industry is facing an unprecedented period of pain.
Still, Shell has built a reputation for excellent project management over the years, and now more than ever, the company needs to show that it can execute. So, in many ways, the success or failure of the merger depends on Shells ability to execute. Unlike RBS, Shell has a history of being able to integrate new businesses successfully.
So overall, it all comes down to BG and Shells management teams and the way they decide to go about integrating the two companies.
Arough appraisal
This is just aroughappraisal of Shell’s prospects. Before making a trading decision, you should conduct your ownresearch to see if the company in question is suitable for your portfolio and financial goals.
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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
