The Shell-BG Group tie-up: Yes or no?
In April 2015, Shell offered to pay 0.4454 of its B shares and 383 pence in cash for each BG share in a deal valued at $70 billion. The offer entailed a sizable 50%-plus premium for the BG Group by assuming a $90/bbl forward oil price. Shell had to seek approval from at least 50% of its shareholders, and BG Group would require the backing of 75% of its shareholders for the deal to go through. On January 8, 2016, Standard Life, a major shareholder in both Royal Dutch Shell plc and BG Group, announced that it would vote No to a merger between Shell and BG at a Shell shareholder meeting to be held on January 27, stating that “the proposed terms of the acquisition of BG are value-destructive for Shell shareholders.” However, the same investor would vote Yes at a BG shareholder meeting on January 28. A volatile oil market further complicated the M&A decision. With oil prices in the low $30s/bbl, the market was worried that Shell’s view of the future was overoptimistic. Shell top executives needed to make a business case to win shareholder support, which might turn into a case of overpromising and underdelivering to investors.
The case offers an opportunity to study the pros and cons of a deal on both sides, as well as to evaluate the strategic benefits and the price tag. Students gain an understanding of three valuation techniques – discounted cash flows (DCF), net asset value (NAV) and market multiples – and of the sensitivity of the deal value to changes in forward oil prices. The incomplete and uncertain nature of firm valuation is revealed and the reality that financial analysis often depends on many assumptions.
Shell, Materials, Oil and Gas
2015-2016
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