Shell and BG merger looks a done deal

Before the end of this week we will know whether shareholders approve of Royal Dutch Shell's £34.4 billion acquisition of British buddy BG Group, the largest industry merger of recent times. There are strong arguments both for and against the marriage, of course, and there will be speculation right up to the eleventh hour. However, trading in both Shell and BG shares is picking up and there is a strong feeling in the City that this is a done deal.

The difference between BG's share price and the figure Shell is offering - the arbitrage spread - has narrowed to 2.5%, its lowest during the merger saga. That's in part because Aberdeen Asset Management, a top ten shareholder in both Shell and BG, gave its support to the £34 billion acquisition last month in an interview with Reuters.

If both sets of shareholders approve the deal, every BG share will be exchanged for 383p cash and 0.4454 Shell B shares. With Shell currently at 1,398p, each BG share is valued at 1,005p per share, or £34.4 billion in total. They currently trade at 980p, a 2.5% discount.

That reflects a 21% premium to the price before the tie-up was announced in April 2015. Shell shareholders vote on the deal on Wednesday 27, followed by BG's on Thursday.

Shell hasn't had the easiest time gaining support for the acquisition, especially given the further collapse in oil prices. It slumped another 4% Monday to $30.78 and Brent crude has more than halved since last May. Shell chief executive Ben van Beurden thinks we are in for a prolonged period of muted prices, so this is certainly a move for the long-term.

The pair brought forward their quarterly and full-year updates last week, with Shell confirming fourth-quarter profit of $1.6-$1.9 billion (£1.1-£1.3 billion) on a current cost of supplies basis, compared to the $3.3 billion it made a year ago. Its upstream division - exploration and production - will make more than expected at $0.4-$0.5 billion, while its downstream division - refining and processing - will miss expectations at $1.4-$1.6 billion.

Shell has cut costs too, with 2015's $4 billion reduction to be followed by $3 billion more in 2016, plus further savings from the BG deal. There's even $30 billion of assets to be sold in 2016-2018, topping up the $20 billion of disposals already made.

Confirming its 2015 and 2016 dividend at a minimum $1.88 a share, the shares offer a jaw-dropping 9.4% dividend yield after recovering from last week's global market sell-off.

BG's boss Helge Lund reckons this year's results will be at least in line with expectations, setting a minimum $2.3 billion headline earnings figure, with at least $0.6 billion of disposals, re-measurements and impairments after tax.

Interest has certainly been picking up. Over the last week, Shell's trading volume at Interactive Investor is up by two-thirds, and three times more Interactive Investor customers bought Shell shares last week than sold them.

Trading of BG shares also surged by 56%, although this was largely selling activity as BG had recovered to a three-week high.

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