Shell agrees to buy BG Group for £47bn

One of the largest takeovers in oil sector for 20 years comes after fall in crude prices, as gas group’s CEO looks set to receive £25m in exit pay deal

Royal Dutch Shell has agreed to buy gas group BG for £47bn after a plunging oil price prompted a swoop on its long-coveted takeover target.

The takeover of BG, formerly the exploration arm of British Gas, will be the the energy sector’s biggest for a decade and create a company worth almost £180bn.

Shell is already Britain’s largest company with a valuation of about £130bn and the combined group will be more than 50% bigger than the second largest HSBCcorporation.

BG Group’s chief executive, Helge Lund, who joined in early February, will leave once the deal goes through next year, and could walk away with more than £25m. His pay deal sparked a shareholder revolt in November, forcing BG to link his earnings more closely with company performance.

Lund, who stayed at BG’s head office in Reading on Wednesday instead of facing analysts and investors in London, was hired to overhaul the company. But he may now receive a windfall for keeping BG ticking over until the deal is closed. The takeover also represents a multimillion pound pay day for the investment banks who advised the companies. Goldman Sachs and Robey Warshaw will get about £33m each for advising BG, while Bank of America Merrill Lynch will receive £55m for working for Shell, according to Thomson Reuters.

The takeover, which must clear regulatory hurdles around the world including in Brussels and Australia, was hatched by Shell’s chief executive, Ben van Beurden, and Andrew Gould, the chairman of BG. Van Beurden said he called Gould on 15 March to suggest a deal and that negotiations moved quickly.

Van Beurden said Lund would stay on at BG to manage the business but that he would “do his own thing” once the deal was complete.

Helge Lund, the new chief executive of BG, stands to make £25m from the proposed merger with Shell.
Helge Lund, the new chief executive of BG, stands to make £25m from the merger with Shell. Photograph: Andrey Rudakov/Bloomberg/Getty

“I do not know Helge very well but I know him well enough to know that I had a good and constructive and transparent dialogue with him and he said, ‘This is how I see it.’ And that’s perfectly OK,” Van Beurden said.

Gould said Lund had stayed in Reading to brief employees about the deal and that the two-hour drive to London was too time consuming for him to join him and the Shell bosses to present the takeover to the City.

On Lund’s pay, Gould said: “The shares Helge has been [awarded] are subject to performance conditions that will not be known until this transaction has completed. I’m afraid you will have to wait until the deal has completed to know what the final number is going to be.”

There has been widespread speculation that BG would become a takeover target as part of a wave of deals in the sector. Many City analysts predicted Exxon of the US would make a move on the business. Gould declined to say whether any other companies had approached him about a takeover.

Shell offered cash and shares worth £13.50 per share – 50% more than BG’s market value on Tuesday night. It is the biggest oil and gas takeover since Shell’s Dutch and British arms were formally merged in 2004, and the 10th biggest mergers and acquisitions deal ever, according to data from Thomson Reuters.

Largest energy takeover merger deal of all time

BG’s share price surged 27% to £12.06 on the news, while Shell shares fell 8.6% to £21.16.

Van Beurden said the hefty premium Shell was paying was not outlandish in the energy sector and that the low oil price had presented an opportunity to buy BG, whose shares had fallen by more than a quarter since the oil price began its slide last June.

“The logic has always been compelling. Of course the environment today has made the value piece of its a whole lot more compelling,” he said. “We have been looking at BG for a long time and we thought this was the right time to move.”

He added that the combined business will sell off £20bn of assets from each company between 2016 and 2018, most of which will be returned to investors via a £17bn share buyback.

Shell, whose interests include operations in Malaysia, the North Sea and Nigeria, said the deal would create pretax cost savings of about £1.7bn a year. It will add some 25% to the company’s proved oil and gas reserves and 20% to production, as well as strengthening its position in new oil and gas projects, particularly in liquified natural gas [LNG] in Australia and deepwater production off Brazil. BG and Shell both have huge interests in the LNG market, which allows gas to be shipped around the world in tankers.

Like other oil and gas companies, BG has been hit hard by falling oil prices. A glut of oil and weak demand has caused the price to fall nearly 50%, to around $59 a barrel, since last summer. The company’s profits were down nearly 20%, to just over $900m, in the three months to the end of last year.

Shell has also been affected by falling oil prices. Only two weeks ago the Anglo-Dutch business unveiled 250 job cuts in the North Sea and changes to shift patterns for workers to cut costs. But Van Beurden said the company was committed to the North Sea and would invest £4bn between 2016 and 2018.

Asked if he could guarantee no further North Sea job losses from the deal, Van Beurden said: “There are no guarantees in life. Irrespective of what happens [with the BG deal], we will have to look at how we make the North Sea a strong and healthy [site] again.”

How the companies compare

Royal Dutch Shell

• Founded in 1907 when Royal Dutch merged with Shell. Based in The Hague

• Chief executive Ben van Beurden has been with firm for 32 years. Last year he was paid €24m.

• Biggest company in the FTSE-100, with market value £130bn

• Made $15bn profit in 2014

• Has 92,000 staff

• Produces: 3m+ barrels, oil equivalent, a day

• Wants BG because it needs more reserves and wants to be bigger in gas industry

BG Group

• Formerly the upstream business of state-owned British Gas. The company was split into two separate firms, BG and Centrica, in 1997. Based in Reading.

• Chief executive: Helge Lund, has been with BG for 2 months. Shell don’t want him to stay, and he will likely walk away with more than £25m

• 14th biggest company in the FTSE-100, with market value at bid price of £47bn

• Made a $1bn loss in 2014

• Has 5,143 staff

• Produces 606,000 barrels, oil equivalent, a day

• BG is desirable because it has key businesses in Brazil and Tanzania and is a leader in liquefied natural gas. Its shares tumbled in recent months, so the assets look a bargain.

Contributors

Julia Kollewe and Sean Farrell

The GuardianTramp

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