It has been announced this morning thatRoyal Dutch Shell(LSE: RDSB) has reached an agreement to buy smaller peerBG(LSE: BG) in a deal valued at 47bn.
This deal is being touted as the first super merger of 2015 and is the firstbig merger between energy companies in a decade it will be Shells biggest deal ever!
Shell is offering 383p per share in cash and 0.4454 Shell B shares for each BG share, valuing BG at approximately 1,367p per share based on Shells closing price on 7 April 2015. Thats a premium of 50% to BGs closing price on 7 April 2015.
The merger will increase Shells oil and gas reserves by 25% and will boost the companys production by 20% based on BGs 2014 production figures. Whats more, Shells analysts believe that the merger will generatepretax synergies of approximately $2.5bn per annum.
As part of the deal, Shell announced today that the company expects to commence ashare buyback programme in 2017 of at least $25bnfor the period 2017 to 2020. This buyback is designed tooffset the shares issued under Shells scrip dividend programme, and to significantly reduce the equity issued in connection with the BG tie-up.
Commenting on the combination, Shell CEO Ben van Beurden said:
BG will accelerate Shells financial growth strategy, particularly in deep water and liquefied natural gas: two of Shells growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BGs competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.
A good deal?
At first glance, Shells acquisition of BG seems to make sense. Indeed, the tie-up will allow Shell to boost production by 20%, increase reserves by 25% and the companys LNG production will surge.
However, BG has run into plenty of trouble over the past few years. For example, the company has recently been unable to fulfil its export commitments of liquefied natural gas from Egypt because the Egyptian government has taken too much gas for domestic consumption. Moreover, the group isheavily committed to developing oil fields in Brazil where the state oil company, Petrobras, is deeply embroiledin a corruption scandal.
For 2014, BG reported a $1.1bn loss due to write-offs driven by lower oil and gas prices. In addition, during February of this year the group warned that further write-downs totalling $9bn are on the way.
So, BG has had its fair share of troubles. Nevertheless, it seems as if Shell is willing to pay a hefty premium to get its hands on BGs LNG assets, a business Shells management clearly wants to bolster.
If Shell can return BGs business to growth, the merger makes sense. But if BG continues to rack up losses, the deal could be a thorn in Shells side for decades to come.
Slow and steady
Whatever the outcome of this deal, one thing is for sure — Shell is a dividend champion and this is unlikely to change any time soon.
However, if you already own Shell,and you’re looking for other top dividend paying stocks, then why not check out The Motley Fool’sincome report double pack.
For a limited time only we’ve bundled together our top income report,”How To Create Dividends For Life“, with a new report entitled,”My 5 Golden Rules for Building a Dividend Portfolio”.
Justclick hereto download the free report double pack today!
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.