Shell Buys Rival BG Group

There is some regulatory risk that a deal of this size could run into hurdles, as evidenced by BG’s shares currently trading roughly 14% below the implied price of Shell’s offer

Stephen Simko, CFA 8 April, 2015 | 5:16PM
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On April 8, Royal Dutch Shell (RDSB) announced its intention to acquire BG Group (BG.) in a cash-and-stock deal that values BG’s equity at £13.50 per share, or 11% above our current £12 fair value estimate. The deal will be roughly 70% stock and 30% cash, and is expected to close in early 2016.

Our BG thesis has been that near-term execution problems and political issues in Brazil and Egypt were creating an attractive entry point for long-term investors. And to be sure, a company of Shell’s size and financial health is in a great position to take a long-term view. But the 50% premium Shell is offering over BG's April 7 closing price is nonetheless a rich offer.

We plan to adjust our valuations to reflect the risk of this acquisition not going through, but nonetheless will be increasing our BG fair value estimate and lowering Shell’s to reflect the offer price, although our moat ratings for both companies are unchanged.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Royal Dutch Shell PLC B1,362.80 GBX2.84Rating

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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