Shell Prospects Improve Following BG Acquisition

Once finalised, the BG deal will see Shell's proved reserves and current production increase thanks to BG's Brazilian oil interests in the Santos Basin

Stephen Simko, CFA 23 June, 2015 | 4:33PM
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Like many investors, we thought Shell's (RDSB) April offer to take over BG Group (BG.) for an implied $85 billion was a bit on the rich side and thus a very good deal for BG's shareholders. But offers funded with the acquiring company's equity possess an interesting quirk: the more the market dislikes an acquisition and the market certainly didn't like this deal, the cheaper the acquisition becomes.

The cash portion of Shell's offer is paying each BG shareholder £3.83 per share. At current share prices, that is equal to roughly 30% of the total consideration on offer.

The rest of this acquisition will be funded by issuing Shell equity to replace BG's outstanding stock. The price of Shell's London shares has declined 15% since April 7, the last trading day before the merger announcement. This decline in the company's market value has had the impact of reducing the implied offer price for BG investors to £12.20 per share from an initial £13.67.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
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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