Royal Dutch Shell’s (LSE: RDSB) £47bn billion cash-and-stock deal to buy BG Group (LSE: BG) is one of the largest takeover deals ever to take place in the UK.
However, based on the current spread between BG’s current share price and Shell’s offer, it appears that the market does not believe that the deal will go ahead.
Wide spread
Shell is offering 383p in cash plus 0.4544 Shell B shares for every BG share. At time of writing this works out at around 1,346p, although BG’s shares are only trading at 1,176p, a full 14.5% below the offer price.
Profiting from a deal like this is called merger arbitrage and is big business. Nonetheless, in most cases the spread between the offer and share price of the target is so small that you’d need to be a specialist to make any profit.
With a 14.5% return possible on the Shell-BG merger, this opportunity is one-of-a-kind.
Still, merger arbitrage is a specialist business. You really need to know your targets before you jump in. For example, according to City analysts the market implied probability of the deal closing is 75% to 80%, which leaves room for error. The deal is not set to close until early next year and it will require the approval from several regulators before it can go ahead.
Further, there’s a chance that Shell could walk away if the oil price tumbles or investor sentiment turns against the deal.
There really is no guarantee that the deal will actually go ahead. Therefore, unless you’re a merger arbitrage specialist, it could be wise to stay away.
A great deal
A merger arbitrage play on the Shell-BG deal may not be suitable for most investors but for existing shareholders, the deal will yield great results.
When combined, the enlarged company will be the world’s largest producer of liquefied natural gas, which has become somewhat of a super-fuel over the past decade.
LNG combines the clean combustion and calorific value of natural gas with the transportation flexibility of liquid hydrocarbons. As a result, demand for the fuel is set to double by 2030. Demand has expended by 85% during the past decade.
On the other hand, demand for oil is only set to increase by around 20% over the same period.
All in all, if everything goes to plan the deal will boost Shell’s oil production by 1m barrels of oil and natural gas equivalents per day, adding to the group’s existing production base of 3.7m boed.
This puts Shell on track to become the world’s largest oil producer. US oil industry champion ExxonMobil currently produces around 4.7m boed.
Set to boost growth
Add all of the above factors together, and it becomes clear that Shell’s decision to buy BG will only boost the company’s growth, earnings and dividends.
What’s more, with a dividend yield of 5.9% at present, Shell’s shares make the perfect buy-and-forget investment. There’s no need for complex merger arbitrage trades.
