Shell announces massive takeover bid for BG

Posted on 10 Apr 2015 by Michael Cruickshank

Petrochemical extraction company Shell yesterday announced a bid to purchase rival British company BG.

The two companies announced plans for a £47bn cash and shares deal, where Shell would pay a 50% premium on the April 7 share price of BG.

Shell, already the largest company on the London Stock Exchange, with a market cap of around £177bn will grow yet larger should the deal become successful, with a projected marketing capitalisation of over £200bn.

The company had long been eying BG as a potential takeover target, and has decided that now is the time to make a decisive move.

BG, formerly the exploration wing of state-run British Gas, was spun off into a separate, private company in 1997. They represented an attractive acquisition for Shell, due to their large portfolio of natural gas extraction projects.

Natural gas is seen as a cleaner fuel, producing less carbon dioxide emissions, and thus is a more likely area for future growth in the petrochemicals industry.

“BG will accelerate Shell’s financial growth strategy […] Furthermore, the addition of BG’s competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel,” explained Shell CEO Ben van Beurden in a statement to shareholders.

Shell’s decision to attempt to acquire the company was likely driven by BG’s struggle to maintain profitably in face of an unstable market. Reportedly, BG has generated a loss of £1bn in 2014 along, likely as a result of collapsing oil and gas prices.

Due to the massive size of the deal, it could take some time for it to be official, as it requires approval from a number of regulators across several continents.

Oil price chaos

This latest shakeup within the oil and gas industry is an extension of a wider bout of instability in the market, driven by the collapse in the price of crude oil.

While in the past, Saudi Arabia has cooperated with OPEC to moderate its production in order to keep oil prices high, this strategic calculus has changed. The country’s leadership is now flooding the market with cheap oil in an effort to price out competitors, and hurt geopolitical rivals.

This has caused a number of major hydrocarbon projects to be delayed or cancelled, in addition to countries accumulating record oil and gas stockpiles.

As well as companies, oil producing nations such as Russian, Iran and Venezuela have taken a serious economic hit, creating more regional instability.