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Funds circle for spin-off gains from Shell deal

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Article by Ashley Armstrong published 12 April by The Sunday Telegraph

Funds circle for spin-off gains from Shell deal

The world’s largest private equity firms are already circling the $30bn (£20bn) of assets that could be spun off by Shell following its acquisition of BG Group, the largest ever merger between two UK companies.

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Warburg Pincus and Blackstone are understood to be gearing up to get involved in the biggest industry deal for the past two decades. Shell’s £47bn takeover of its smaller oil and gas rival is expected to be the catalyst for a wave of consolidation in the sector.

Rival private equity firms Carlyle, Riverstone, KKR and Apollo, which also have a track record in energy investments, are expected to take an interest in the pool of assets that will be put up for grabs by Shell.

Shell’s chief executive, Ben van Beurden, said that the combined company would make $30bn of asset sales “from 2016 to 2018 averaging $10bn per year”.

The Shell boss added that there would also be some smaller disposals this year, although there were “weak market conditions for divestments currently”. Shell is expected to try to sell off some of its ageing North Sea operations, but will struggle to find a good price for them as E.ON, Total and RWE are already working on plans to pull out of the North Sea.

While Shell extolled the virtues of its tie-up as a way to accelerate into deepwater strategy, complex and expensive projects are likely to be the first on the list of possible disposals.

Analysts have also raised the prospect of Shell opting to focus on BG’s Australian assets, which could lead it to sell off its own operations in the region.

Mr van Beurden also said that the companies had an overlapping presence in 15 countries, leading analysts to believe that there will be a number of disposals in order to cut costs and produce the $2.5bn of annual synergies touted in the companies’ presentations.

The blockbuster deal is not forecast to close until at least the beginning of 2016 as it needs approval from regulators in Brazil, China, Australia and the European Commission, all of which could ask for disposals to be made to appease antitrust concerns.

Pascal Menges, manager of the Lombard Odier Global Energy Fund, said: “The deal comes at a hefty price and management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small.”

While analysts rushed to speculate on whether ExxonMobil will gatecrash the tie-up or have even greater ambitions with a BP deal, industry bankers said that Shell’s blockbuster deal would also independently spawn a string of deals through asset sales.

Shell said that its swoop on BG was a “bold and compelling move” but the oil giant also revealed that its deal relied on a bet that oil prices will recover by almost 50pc over the next year.

“Having an oil major effectively call the bottom of the market will give others faith to invest in deals too,” one industry banker said.

Private equity firms raised $49bn of capital last year for specific energy-focused funds to target opportunities that arose from cheaper commodity prices.

Warburg Pincus raised $ for its fund while Blackstone closed its second $4.5bn dedicated energy fund in February.

The private equity firm’s previous dedicated energy fund had around $2.5bn in assets and Blackstone’s chief executive, Stephen Schwarzman, has remained bullish on energy.

“I think this is going to be a wonderful, wonderful opportunity for us,” Mr Schwarzman said during fundraising as the price of oil fell below $60 from its peak last June. Warburg Pincus and Blackstone have also shared success in energy after teaming up to fund small explorer Kosmos Energy, which discovered the massive Jubilee oilfield off the coast of Ghana in 2007.

Buy-out groups were previously focused solely on the North American oil market.

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