MarketWatch: Shell upgraded on mega-merger hopes

ABN Amro sees over $10 billion a year in annual savings

By Steve Goldstein, MarketWatch
Dec 5, 2006

LONDON (MarketWatch) — Royal Dutch Shell was upgraded to buy from hold by ABN Amro on Tuesday, as the brokerage said the case for merging two of the largest European oil companies is compelling but largely overlooked by the market.

There’s been some speculation that BP could tie up, and David Cline in a 116-page analysis examines what would happen if Shell or BP would merge with each other, or with France’s Total

A deal between the two or any combination of the three would be a good for shareholders, Cline says. “The strategic and financial logic of a combination is strong,” Cline wrote in the report. “The regulatory and other barriers that we consider in this note should be surmountable. Catalysts exist. We see gains of up to 63% for shareholders from feasible combinations.”

Cline estimated that $186 billion in value could be created by merging Shell with Total, $183 billion created by merging BP and Shell and $159 billion by linking BP and Total. Any combination would form a company that would dwarf the world’s largest oil company, Exxon Mobil.

The reasons for putting together two of the European oil majors is different from what’s spurred deals in the past.

“One (reason) is the persistent desire to grow EPS in an industry environment in which many companies are finding it increasingly difficult to raise output.

Another is the desirability of reducing costs in order to protect investment plans and dividend schedules against the credible risk of an oil price crash,” the broker said.

To get around the inevitable antitrust concerns, he said the downstream operations of BP should be sold off entirely if it and Shell were to merge. Cline estimated that business is worth $23 billion.

“Precedent suggests that the FTC would give the combined group one year after legal completion of the merger in which to complete a spin-off or trade sale,” he said.

The best way to get exposure to the mega-merger possibility would be to buy Shell shares, Cline advises, in upgrading the stock from hold.

He also lifted his price target to 21.50 pounds a share from 20.70 pounds. U.K.-listed Shell A-class shares (UK:RDSA: news, chart, profile) rose 1% at 17.93 pounds a share on Tuesday.

BP shares rose 1.1%, and Total shares added 0.9% in Paris. 
Steve Goldstein is MarketWatch’s London bureau chief.

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