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Will Royal Dutch Shell Be Able To Successfully Integrate BG Group plc In Its Fold?

Screen Shot 2015-04-27 at 23.47.27

Screen Shot 2015-04-27 at 23.48.27

Bidness Etc takes a look at challenge facing Shell as it incorporates BG Group in its fold

By: MICHEAL KAUFMANPublished: Apr 27, 2015 at 1:45 pm EST

Royal Dutch Shell plc (ADR) (NYSE: RDS.A) $70 billion acquisition of BG Group plc (ADR) (OTCMKTS: BRGYY) is a first of such magnitude for the Hague-based oil company. The energy company did not become part of the wave of merger activity that swept the energy industry, post-1998, after oil prices crashed.

Some of the big merger deals included the Total SA (NYSE:TOT) acquisition of Elf, Chevron Corporation (NYSE:CVX) merger with Texaco, BP plc (NYSE: BP) purchase of Amoco and Exxon’s acquisition of Mobil from Mobil Corporation (NYSE:XOM). Royal Dutch Shell’s competitors have had the experience of mega mergers, and they know from experience what the company goes through during and after the integration process.

Some of the most valuable BG Group assets that Shell would be acquiring, do have certain risks associated with them. They include an expensive liquid natural-gas (LNG) project in Australia, and the corruption scandal at one of BG’s key partners Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).

Royal Dutch Shell’s history of acquiring comparatively smaller companies has produced varied results. In 2010, Shell paid $4.7 billion to acquire majority stake in US shale company East Resources Inc. However, the company later reduced its shale footprint and reduced the value of its holdings in North America by nearly $2 billion.

The company neither offered any statement on its earlier purchases, nor did it disclose the progress made on integrations through acquisitions. However, it says that assets bought through East Resources still offer prospects for growth.

According to analyst Jason Gammel at Jefferies Group LLC, Shell did not have enough experience in handling a mega merger.

Bankers, who have worked with Royal Dutch Shell, say that even though the company did not have the experience of purchasing a large company, it has been able to build a methodical process for assessing possible acquisitions.

During the last 10 years or so, Royal Dutch Shell has made changes to its corporate structure, that could make the whole integration process for the company a lot easier. Royal Dutch Shell remained divided into two semi-distinct entities. Shell had its headquarters in London, while Royal Dutch was centered in the Netherlands.

In 2004, an accounting scandal broke out after which the company was reorganized and the management was consolidated. That has led to Shell becoming a more centralized organization.

The restructuring has enabled the company to get into deals using stock. That was not possible previously due to the company’s dual structure. With the financial hurdle to acquisitions removed, Royal Dutch Shell was able to use its shares for 70% of the value of the recent BG Group purchase.

The pending Shell-BG agreement would be the second-most expensive deal in the energy industry after the 1999 purchase of Mobil by Exxon. It is stated to close by the start of next year. It is also Shell’s largest acquisition since it purchased Canada’s Duvernay Oil Corporation for over $5 billion.

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