Convergence

During the decade under Colao’s leadership, Vodafone has made the transformative journey from mobile operator to become a converged player, providing both fixed and mobile services. Via a combination of acquisitions and organic capital expenditure, the company has invested heavily to gain a foothold in fixed-line and pay TV markets.

Most recently, Vodafone Australia, the company’s joint venture in that country, has agreed to merge with local broadband provider TPG Telecom in a bid to bolster its competitive positioning in Australia’s telecom sector.

Liberty Global

Elsewhere, the group also agreed to pay €18.4bn to buy Liberty Global’s cable networks in Germany and Eastern Europe to create a stronger competitor against former monopoly incumbents such as Deutsche Telekom. Few analysts question the wisdom of Vodafone’s strategy to use acquisitions to bring much needed scale to the group, but many are worried that the task of integrating the new networks comes at a time of an upcoming leadership change.

Nick Read, who will replace Colao in October, is widely seen as an unproven CEO. He was appointed the group’s CFO only back in 2014 — although investors should be reassured by his experience in running the group’s British and emerging market divisions.

Rising debt

Another cause for concern is the group’s rising debt burden. The debt-fuelled acquisition of Liberty’s assets will raise net debt to roughly €50bn at the time of completion, close to the top end of management’s target range.

The Liberty deal would also mean that the business would be more exposed to slower-growing markets in Europe, which will account for more than three-quarters of its combined operating profits. Intense competition in Italy and Spain remains a cause of unease, even though trading conditions there have recently improved considerably.

Additionally, investors should take note of the growing cost of infrastructure and mobile spectrum in recent years. Vodafone hasn’t always managed to cover the dividend with free cash flow (after spectrum and restructuring costs) since the sale of its stake in Verizon Wireless in 2013, and that has put a lot of pressure on its balance sheet.

Dividends

In spite of this, management remains committed to its progressive dividend policy. Last year, dividends per share rose by 2% in euro terms to 15.07 euro cents, or 13.33p. This means that at its current share price, Vodafone has a dividend yield of 8.1% — making it one of the highest yielding stocks in the FTSE 100.

Investors should nonetheless be wary. Even after a 30% year-to-date fall in its share price, valuations don’t look cheap. Shares in Vodafone are worth 18.9 times its expected earnings this year, despite sluggish growth and significant medium-term uncertainty.

The post How low can the Vodafone share price go? appeared first on The Motley Fool UK.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As to the proposed deal itself, there will be no cash changing hands, much to the chagrin of Aberdeen shareholders who have seen the value of their holding shrink by more than 35% since hitting highs in April 2015. The deal will instead be all-share, with Standard Life shareholders owning 66.7% of the combined company. For Aberdeen shareholders this would work out to 0.757 new Standard Life shares per Aberdeen share currently owned.

A stroke of genius or folly?

While I generally have a sceptical attitude towards mega-mergers or colossal acquisitions, this deal does on the face of it make considerable sense. Aberdeen’s share price has been hammered over the past two years due to 15 straight quarters of net outflows from its funds, which are heavily skewed towards Asian and emerging market equities that have fallen out of favour with investors. This has put pressure on profits and dividends, but combining with the relatively healthier Standard Life would relieve some of this pressure in the short term.

For Standard Life the deal would considerably bulk up its fund management operations as it tries to shift itself away from a pure life insurer to more of a fund manager. Both businesses will be highly complementary as well, with Aberdeen’s core expertise in emerging market equities and Standard Life’s in fixed income.

A plan for the future  

Looking several years out the thesis behind the deal also passes the eye test. Active managers have been punished in recent years by the shift towards passive investing and an increased awareness on fees from investors of all stripes from mom and pop retail investors to massive pension funds and Warren Buffett.

This has put incredible downward pressure on fees across the industry and although this deal wouldn’t completely alleviate this problem, it will allow the combined firm to protect its margins through cost-cutting. Analysts reckon that around 10% of the combined company’s 9,000 strong workforce could be shown the door.

Job cuts, efficiencies of scale and being able to offer prospective investors a wider range of in-house fund options is just what both companies need to compete against American giants like Blackrock in this new cut-throat environment. It’s still uncertain whether this deal alone will be enough for the combined Standard Aberdeen to thrive in the tough years ahead. But it definitely improves their odds.

With both firms’ shares trading relatively cheaply at under 14 times consensus forward earnings, investors who have a more bullish view than I on the fate of active managers may find this an interesting point to begin a stake in either company.

The Motley Fool’s method for making a million

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The spread between the BG’s traded share price and its offer terms have been fluctuating quite a lot since the deal had been announced. It widened to peak at 17% in August, as the extended falls in the oil price raised the market implied likelihood that the merger would fall through, or the offer terms would be changed.

But, as the spread has narrowed again, it could be seen as evidence that investors believe the prospects of the deal reaching completion under the current terms is increasingly likely. This is despite the fact that the shareholders of both companies have yet to vote on the planned merger. In addition, the recently extended falls in the oil price have made the deal seem extremely expensive.

With the benefit of hindsight, Shell made the deal with BG too early and ended up paying too much. Had Shell waited a few more months, it would acquire BG much more cheaply. But this logic assumes another bidder would not have come along and made its own offer for BG.

That said, there are still plenty of acquisition opportunities that Shell could have instead made, with the oil price trading below $30 a barrel. None may have the scale that BG has to offer, but I’m sure a combination of acquisitions with organic capital spending would be just as value-accretive, if not more.

There are few dissenting voices from major shareholders or analysts who disagree with the logic behind the merger. Standard Life is one of the few, though. Its head of equities, David Cumming, said the deal was “value destructive” for Shell’s shareholders and that “a lot [has] changed since the bid was announced”.

However, there are many reasons why the deal is likely to go ahead. Despite Standard Life’s open criticism of the merger, most are likely to vote in favour of the deal. They tend to agree with the longer term rationale of the deal.

The acquisition lowers Shell’s average cost of production, albeit to a level with is still substantially higher than today’s market price. It would also boost its production, oil and gas reserves and benefit from increased scale in the LNG business. BG’s production figures have been faring much better than Shell’s own figures. Between 2014 and 2015, BG’s oil production by 16%, compared to Shell’s mid-single digit decline.

But although BG’s production figures are great, its cash flow position is not. It expects to bring in around $4.3 billion in operating cash flow in 2015, but it has spent around $6.4 billion in capex to grow production (amongst other things). This means the shortfall has to be funded through asset sales and increased debt, and that is before we consider dividend payments. With oil prices having fallen further recently, this free cash flow shortfall is only set to widen.

Shell probably needs the oil price to be well over $60 for the deal to become value-accretive. With the oil price currently trading at less than half of that, I do think Shell is overpaying.

The post Royal Dutch Shell Plc & BG Group plc Merger Looks Like A Done Deal appeared first on The Motley Fool UK.

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This deal is being touted as the first ‘super merger’ of 2015 and is the first big merger between energy companies in a decade — it will be Shell’s biggest deal ever!

Shell is offering 383p per share in cash and 0.4454 Shell B shares for each BG share, valuing BG at approximately 1,367p per share based on Shell’s closing price on 7 April 2015. That’s a premium of 50% to BG’s closing price on 7 April 2015. 

The merger will increase Shell’s oil and gas reserves by 25% and will boost the company’s production by 20% based on BG’s 2014 production figures. What’s more, Shell’s analysts believe that the merger will generate pre‑tax synergies of approximately $2.5bn per annum. 

As part of the deal, Shell announced today that the company expects to commence a share buyback programme in 2017 of at least $25bn for the period 2017 to 2020. This buyback is designed to offset the shares issued under Shell’s scrip dividend programme, and to significantly reduce the equity issued in connection with the BG tie-up.

Commenting on the combination, Shell CEO Ben van Beurden said:

“BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell’s growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BG’s competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.”

A good deal?

At first glance, Shell’s acquisition of BG seems to make sense. Indeed, the tie-up will allow Shell to boost production by 20%, increase reserves by 25% and the company’s LNG production will surge. 

However, BG has run into plenty of trouble over the past few years. For example, the company has recently been unable to fulfil its export commitments of liquefied natural gas from Egypt because the Egyptian government has taken too much gas for domestic consumption. Moreover, the group is heavily committed to developing oil fields in Brazil where the state oil company, Petrobras, is deeply embroiled in a corruption scandal. 

For 2014, BG reported a $1.1bn loss due to write-offs driven by lower oil and gas prices. In addition, during February of this year the group warned that further write-downs totalling $9bn are on the way. 

So, BG has had its fair share of troubles. Nevertheless, it seems as if Shell is willing to pay a hefty premium to get its hands on BG’s LNG assets, a business Shell’s management clearly wants to bolster. 

If Shell can return BG’s business to growth, the merger makes sense. But if BG continues to rack up losses, the deal could be a thorn in Shell’s side for decades to come.

The post Royal Dutch Shell Plc Set To Buy BG Group plc For £47bn appeared first on The Motley Fool UK.

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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.