Royal Dutch Shell’s proposed £47bn purchase of BG, announced last week, has prompted a spate of upgrades on the oil group’s target.
BG shares have climbed 2.5p to 1170.5p as Investec moved from sell to hold and raised its target price from 800p to £12.30. Analyst Neill Morton said:
We regard BG as a company with a decent asset base. However, we did not believe that its longer-term growth options (beyond Brazil and Australia) justified its premium valuation being sustained. Nor did we believe that it would be the subject of a takeover bid at such a sizeable premium. Clearly, Shell has disproved our thesis, and we upgrade to hold.
Meanwhile Deutsche Bank said BG was the best way to play the proposed merger:
On completion, expected early 2016, BG shareholders will receive 383p a share plus 0.4454 RDS B shares. The structure of the transaction inextricably links BG’s fair value to the RDSB share price. At close of business on 9 April RDS B at 2032p would imply a price of 1288p for BG upon close.
The above establishes a framework for value at the assumed point of deal completion, but given the linkage and deal terms what is the appropriate price for BG today? We first need to consider dividend flows. If we assume completion in 12 months, then one would expect Shell to pay four quarterly dividends together equating to $1.88 a share (an outflow of value for a BG shareholder to deal close). Over the same period, BG should pay three dividends – the 2014 final of 9.52p, a 2015 interim of “not more than 14.38 cents” and a 2015 final of “not more than 14.37 cents”. Adding 383p cash to 0.4454 Shell B at 2032p (9 April close) and making the net deduction for dividend payments implies a ‘fair’ BG price at close of business on 9 April of 1260p – a 8% or so premium to the 1160p close. The attraction of this spread depends on perspective; with a haircut for time-value, risk of deal failure, risk of a counterbid, risk of declines in price of RDS B and foreign exchange all relevant considerations.
