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ALEX BRUMMER: Shell-BG deal no longer makes economic or industrial sense and should be rejected by long term investors

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ALEX BRUMMER FOR THE DAILY MAIL26 December 2015 

Unlike the Kraft Cadbury takeover in 2010-11, which stretched over the Christmas holiday, the Shell bid for BG is unlikely to have families choking on their ‘Fruit & Nut’ bars.

Indeed, many people won’t even have a clue as to what BG Group – once the exploration arm of British Gas – actually does.

The only time the confusingly named group attracted public attention in recent times was when in late 2014 its board, out of touch with the public mood, proposed to hand new chief executive Helge Lund a £25million pay packet.

The governance failings of a year ago almost certainly undermined the willingness of some investors to back its future independence.

The decision facing investors this holiday season is whether to accept the Shell offer, currently valued at £35billion (against £47billion when it was first unveiled in April) should go ahead.

Investors in both companies have until January 27 to make up their mind.

Under the scheme of arrangement the consent of 50 per cent of Shell and 75 per cent of BG investors is required.

Originally the deal looked like no-brainer. It would end the governance and scale problems for BG and give Shell access to its reserves, saving Europe’s largest oil company the huge capital costs of exploration in the Arctic, Canada and elsewhere.

The economics looked good with the oil price at the $60-a-barrel level and forecasts it would rise back to $70 by the time the deal – which awaited overseas approvals – was done.

That all turns out to be pie in the sky. The price of Brent crude has tanked and in Christmas Eve trading stood at $37.50, down 75 per cent on the price 18 months ago.

The roller coaster ride has puzzled investors since the takeover only starts to make a lot of sense at $60-a-barrel. Given recent calamitous forecasting of the oil price, Shell shareholders are being asked to take a huge amount on trust.

This includes the ability of a notoriously bureaucratic management to deliver on the big cuts in costs and capital spending that it is promising to justify the deal.

Should we care about any of this? Yes we should.

As Britain takes to the roads this holiday season (it has little choice with the railways shut for engineering works) the price of petrol at the pumps will weigh more heavily on the minds of households, dare one say, than taste changes to Diary Milk.

Shell, like other oil majors, rarely has the consumer top of the list. Big Oil is notoriously slow to pass on the benefits of lower prices to consumers.

Each time a competitor is taken out of the energy supply market, and that is precisely what Shell is proposing to do, there will be less competition and more pricing power for the majors. That can never be good for drivers.

That is not the only downside. The promised spending and cost cutting promised by Shell – capital outlays are to be reduced to $33billion next year – may be welcome to big battalion investors but to no-one else.

Shell already has accelerated the wind down of operations in the North Sea at the cost of thousands of jobs. The knock-on effects in Aberdeen and on Britain’s oil services sector will be considerable.

One easy cut will be BG’s headquarters and central costs some of which will be switched to The Hague. And you can bet your last dollar that a clever team of accountants already is working on ways to organise the deal so that the joint corporation tax liabilities of the merged companies is lower than when they were separate. The UK exchequer will be a loser.

Then there is the dividend. Shell says that the accretive value of the BG deal means it will at the very least be able to hold the pay-out despite the problems in the wholesale market. Given, however, that all the calculations are based on oil returning to $60-a-barrel this is not a very bankable pledge.

The Shell-BG deal no longer makes economic, investor or industrial sense and should be rejected by long term investors. It is too important to let hedge funds and other latecomers on the share register decide.

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