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. And its also one of the biggest takeoverdeals the oil sector has seen since the creation of the supermajors, createdduring the time of low oil prices in the late 1990s.
However, it seems the marketbelieve that the deal will fall apart. Indeed, the current spread between BGs current share price and Shells offer has grown to around 16%.
Shell is offering 383p in cash plus 0.4544 Shell B shares for every BG share. Attimeof writing this works out at around 1,128p, although BGs shares are only trading at 991p, a full 13.3% below the offer price.
Profiting from a deal like this is calledmerger arbitrage and is big business. Nonetheless, in most cases the spread between the offer and share price of the target is so small that youd need to be a specialist to make any profit.
With a 13.3% return possible on the Shell-BG merger, this opportunity is one-of-a-kind. Whats more, as the merger is set to complete during the first quarter of next year, BG shareholders are set to receive an additional 27p per share via dividends before the deal is finalized.
Including dividend cash, the total possible profit is just under 17%.
Merger arbitrage and trading isnt usually the Foolish way but by buying into the BG-Shell deal, not only do investors stand to profit from the merger, theyll also end up with Shell shares, which are a great addition to any portfolio.
At present levels, Shell supports a dividend yield of 7.5%, the highest yield in the FTSE 100. And for the time being, the companys dividend payout is here to stay.
Shells CEO Ben van Beurden gave a speech earlier this week at the Barclays investment conference, and he stated that Shellsmain priorityis to maintainits dividend payout at present levels.
He also went on to say that the BG-Shell merger is going ahead no matter what and the deal will help strengthen Shells balance sheet.
Moreover,Ben van Beurden told analysts that Shell isplanning for what could be a prolonged downturn of the oil price. This planning includescuts to capital spend while maintaining a sensible and affordable investment programme, cuts to operating costs and asset sales.
With regards to new investments, Shell is implementing a rigorous appraisal process and one that allows only the very best projects to go ahead as long as they are affordable according to the prevailing environment. In addition, cost savings across existing operations have already helped the company reduce per-barrel operating costs by $10 across the group.
The bottom line
Usingmerger arbitrage to profit from the BG-Shell deal could yield a quick 17%. Also, long-term investors will benefit with the allocation of Shell shares received as part of the deal.
But if you’re not interested incomplex mergerarbitrage trades, Shell’s shares make the perfect stand-alone buy-and-forget income investment.
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