Shell M&A leaves managers conflicted

Shell M&A leaves managers conflicted

Royal Dutch Shell has announced a takeover agreement with rival BG Group, in a £47bn deal, using low oil prices to its advantage. The deal could mean the company may end up with a value of more than £200bn. The two firms reached an agreement on 7 April for a cash and shares offer, giving investors a 50 per cent premium on BG Group’s share price. Shell is owned by many equity funds, particularly those which own defensive stocks within their holdings, as shown in the Table.

Ian Forrest, investment research analyst at The Share Centre, said Shell is still a buy for investors. “The deal looks attractive for investors, especially those seeking a higher level of income. BG has long been seen as a takeover target, while Royal Dutch Shell has been pondering its acquisition options for a while. BG’s shares have been hit hard by the fall in oil price, and have traded close to a five-year low for several months, with only a modest dividend to provide some comfort for its shareholders.”

But the takeover is not seen as a positive by everyone. Nick Kirrage, co-head of the Schroder Global Value team, said, “If you look at the average mega M&A, it doesn’t work. Sometimes they do add value, but we are very cautious about this deal. We need to look at the small print, there is some real caution on this kind of thing.” The £1.7bn Schroder Income fund, managed by Mr Kirrage and Kevin Murphy, has a 2.4 per cent holding in Royal Dutch Shell.

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But for Michael Clark, portfolio manager of the £1.1bn Fidelity MoneyBuilder Dividend fund, the acquisition is not necessarily a bad thing. “It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell. This is no danger that Shell will change its dividend policy,” he said.

Mr Forrest added, “For Royal Dutch Shell the logic of the deal is clear – it would instantly turn the group into the largest independent natural gas producer in the world with the resources to fully exploit BG’s vast fields in East Africa, Brazil and Australia. For existing BG investors seeking income this is a good offer. We also retain our ‘buy’ recommendation on Shell for lower risk investors seeking income, due to the potential benefits of the deal and the boost to future dividends .”