Shell Makes $70B Offer for Rival BG Group

Royal Dutch Shell (NYSE:RDS.A) agreed to buy smaller rival BG Group <BG.L> for 47 billion pounds ($70.2 billion) in the first major energy industry merger in more than a decade, closing the gap on market leader U.S. ExxonMobil (NYSE:XOM) after a plunge in prices.

Anglo-Dutch Shell will pay a mix of cash and shares that values each BG share at around 1,350 pence, the companies said. This is a hefty premium of around 52 percent to the 90-day trading average for BG, setting the bar high for any potential counter-bid by a company like Exxon, which has said it would also use the oil markets downturn to expand.

The third-biggest oil and gas deal ever by enterprise value will bring Shell assets in Brazil, East Africa, Australia, Kazakhstan and Egypt, including some of the world's most ambitious liquefied natural gas (LNG) projects.

Shell is already the world's leading LNG company and it would get BG's capacity in LNG logistics -- complex infrastructure that includes terminals, pipelines, specialized tankers, rigs, super coolers, regasification facilities and storage points.

"We are seeing a gasification of energy demand. Shell clearly recognize this," said Richard Gorry, director at JBC Energy Asia. "That said, Shell is still taking a big gamble because if the price of oil and gas doesn't go back up (in the next 24 months), I would imagine this might put them in a difficult position in terms of cash flow."

BOOST TO RESERVES

Shell said on Wednesday the deal would boost its proven oil and gas reserves by 25 percent.

Stitched together by Shell CEO Ben van Beurden and BG Chairman Andrew Gould, the tie-up comes after oil prices halved since last June, putting a premium on access to proven assets rather than costly exploration. Record low interest rates have made it easy to raise cheap funding for big corporate deals.

"We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with," Shell's Van Beurden told a conference call. "We have two very strong portfolios combining globally in deep water and integrated gas".

Britain's BG had a market capitalization of $46 billion as of Tuesday's market close, Shell was worth $202 billion while Exxon, the world's largest energy company by market value, was worth $360 billion.

BG's bonds traded up strongly on the deal and its shares leapt 35 percent to 1226 pence by 1105 GMT. Shell's shares were down 2.5 percent at 2040 pence. BG stock has tumbled nearly 28 percent since mid-June, when the slump in global oil prices began.

The deal represents a windfall for Shell's adviser Bank of America Merrill Lynch (NYSE:BAC). BG's advisers are Goldman Sachs (NYSE:GS) and the smaller Robey Warshaw.

BAML has underwritten a 3.025-billion-pound bridge loan that will be syndicated to other banks and is expected to be taken out by a capital markets raising, according to the offer documents.

OIL PRICE IMPACT

With BG, Shell would be the leading foreign oil company in Brazil. Analysts at investment bank Jefferies said they now expected Shell to surpass Exxon as the world's largest publicly traded oil and gas producer by 2018, with output of 4.2 million barrels of oil equivalent per day.

Global LNG production last year came to 246 million tones per annum. The new Shell-BG group would have 18 percent of global LNG production.

Van Beurden said the presence of two large players in Australia, Brazil and China and the European Union might require a detailed conversation with anti-trust authorities, but was unlikely to lead to forced asset sales.

The halving in crude prices has created an environment similar to the turn of the millennium, when large mergers reshaped the industry. Back then, BP (NYSE:BP) acquired rivals Amoco and Arco, Exxon bought Mobil and Chevron (NYSE:CVX) merged with Texaco.

Most sector bankers were surprised by the news. While some see the move as a "one-off" in a depressed energy market, others could see other big deals happening, flagging perennial targets like Anadarko (NYSE:APC) and BP as possible opportunities for some of the most robust majors such as Exxon or Chevron.

Shell has long been seen as a potential purchaser thanks to its healthy cash flow and relatively low oil price breakeven.

The deal, which should generate pretax synergies of around 2.5 billion pounds per year, will result in BG shareholders owning around 19 percent of the combined group.

Last year, BG Chairman Gould hired CEO Helge Lund from Norway's Statoil (NYSE:STL) to turn around the company. Gould said on Wednesday Lund would remain the CEO through the transition.

However, it was evident the deal was driven by two people: Van Beurden, who took over as the CEO last year, and Gould, a veteran executive who previously ran oil services giant Schlumberger (NYSE:SLB).

"I called Andrew up and we had a very good and constructive discussion about the idea and it very quickly seemed to make sense to both of us," Van Beurden told a conference call.

"What has happened in last month, apart from it being a logical deal, it has also become a very compelling deal from a value perspective," he said.

($1 = 0.6693 pounds)

(Reporting by Narottam Medhora and Sai Sachin R in Bengaluru; additional reporting by Greg Roumeliotis and Denny Thomas, Henning Gloystein, Karolin Schaps, Kate Holton and Chris Mangham; writing by Denny Thomas and Tom Pfeiffer; editing by Bernard Orr, Edwina Gibbs and Keith Weir)