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Is Royal Dutch Shell Plc Making A Big Mistake By Acquiring BG Group plc?

Royal Dutch Shell’s (LSE: RDSB) £47bn cash-and-stock offer for BG (LSE: BG) is one of the largest takeover deals ever to take place in the UK. However, the deal is also rapidly becoming one of the most controversial takeover deals ever to take place here. One fund management is now openly calling for Shell to scrap its offer for BG. 

Call to reject the offer

It emerged this weekend that Ian McVeigh, head of governance at Jupiter Fund Management and one of the City’s biggest fund managers, has compared the proposed takeover of BG by Shell to the disastrous purchase of ABN Amro by Royal Bank of Scotland in 2007. RBS’s ill-fated takeover of ABN Amro ultimately resulted in the government bailout of RBS and years of pain for the bank. 

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Nevertheless, Shell’s management seems to be dead set on going ahead with its $70bn offer for BG. Shell’s chief executive has told investors that the deal would only fall through if “if people stopped using energy”.

Reassuring

To reassure investors that the deal does indeed make sense, Shell has hiked the dollar value of savings it expects to generate by combining with BG. An additional $1bn in savings will come from cost cutting in back office functions, marketing and shipping, which had already been expected to save $1bn a year. Further, the enlarged group will be able to save $1.5bn per annum from a cut in exploration activities, as the combined group spends less on searching for new oil fields. 

Shell’s management had initially predicted up to $4bn in “value synergies” from the merger. Under City takeover rules, Shell can only set out initial operations cost reductions that will be achieved by eliminating clear duplication in the accounts, which accountants can independently verify — duplications such as separate office buildings located next door to each other. The projected “value synergies” include benefits that can’t yet be calculated. 

These cost savings and synergies should ensure that the deal works with oil trading at $60 per barrel, which is the crunch point for much of the industry.

That said, the deal will only really work if Shell’s divestment plan to shift $30bn of non-core assets from the enlarged group goes to plan. These asset sales will allow Shell to pay off the debt resulting from the deal and help sharpen up the group’s portfolio. 

Buy, sell or hold?

There’s no denying that the Shell-BG merger is fraught with risks, especially when you consider that the oil industry is facing an unprecedented period of pain. 

Still, Shell has built a reputation for excellent project management over the years, and now more than ever, the company needs to show that it can execute. So, in many ways, the success or failure of the merger depends on Shell’s ability to execute. Unlike RBS, Shell has a history of being able to integrate new businesses successfully. 

So overall, it all comes down to BG and Shell’s management teams and the way they decide to go about integrating the two companies. 

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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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