Jefferies commented Wednesday on the buyout offer for BG Group plc (LON: BG) from Royal Dutch Shell Plc (ADR) (NYSE: RDS-A)
Analysts Jason Gammel and Marc Kofler felt that the deal made strategic sense, however, cost savings would need to be achieved for the deal to make financial sense.
“Shell is offering on a per share basis 383p of cash and 0.4454 shares of RDS.B to BG shareholders, which values BG at 1350p/sh based on the previous 90-day weighted average of RDS.B - a premium a 50 percent off of yesterday's close,” according to the analysts.
The company was expected to become the the largest publicly traded oil and gas producer at 4.2 mbd by 2018.
Portfolio Growth
Gammel estimated that BG’s Brazilian portfolio would grow from 144 kbd in 2015 to 557 kbd in 2020, “and will become the key underlying production growth driver for Shell.”
The combined companies would also lead in the LNG space with 45 mtpa and a portfolio that was expected to double by 2019.
Before considering cost savings, the analysts expected the transaction to be EPS dilutive by 10 percent in 2016 and 4 percent in 2017, however, it would be accretive by 7-9 percent from 2018-2020.
On a CFPS basis, however, the analysts did not expect accretion through 2020 “unless synergies are achieved” while Shell’s net debt position was expected to grow to about $61 billion following the transaction.
Conclusion
The analysts concluded, “We fully understand the strategic drivers of the transaction, and believe the fit an excellent one for Shell. The imperative now becomes for management to convince the market of the financial implications: near term earnings dilution; a significantly more levered balance sheet; and a higher priority for debt reduction versus dividends on cash utilization.”
The firm maintained a Buy rating on Royal Dutch Shell with a £2,450 price target.
BG Group recently traded at £1,166.00, up 28 percent.
Royal Dutch Shell A shares recently traded at $59.63, down 3.7 percent.
Image credit: Jess Sloss, Flickr
Latest Ratings for RDS-A
| Date | Firm | Action | From | To |
|---|
| Dec 2014 | Deutsche Bank | Downgrades | Buy | Hold |
| Nov 2014 | | | | |
| Jul 2014 | Nomura | Upgrades | Neutral | Buy |
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