Shell's slick take on BG merger cannot hide a poor deal
|
Version 0 of 1. Forget $70 a barrel, the first boast. Forget $60, the second claim. Shell’s takeover of BG Group apparently now makes financial sense at a mere $50. At that price, according to Tuesday’s formal takeover prospectus, the combination would boost cash flow as soon as 2016. “This underlines the benefits of the transaction to shareholders,” intones the bidder, “particularly in the current oil market downturn, as it structurally reduces the oil price breakeven of Shell.” In other words: please, dear investors, don’t get any fancy ideas into your heads about voting down chief executive Ben van Beurden’s landmark £36bn transaction just because the oil price has fallen and the takeover price now looks over-cooked. In the end, one suspects shareholders will do as they are commanded. Appetites for rebelling against titans of the FTSE 100 index are always modest. Even chief sceptic David Cumming of Standard Life didn’t actually say he would vote against the deal. And many institutional shareholders own both stocks and thus can afford to take the view that what they lose on Shell’s swings they will gain on BG’s roundabouts. Related: Shell shareholders move to back £35bn takeover of BG Up to a point, Shell’s ever-reducing recalibration of its breakeven point is persuasive. Lower oil prices always cause operating costs to fall because contractors are expected to shoulder some of the pain. Jobs can be cut, and exploration budgets can be squeezed, and the savings become bigger when pursued over a bigger operation. But scepticism is still the right stance towards this deal. The real question is whether Shell would have agreed these terms – 383p in cash, plus shares currently worth 665p – if it could have guessed oil would fall from $65 a barrel during talks last April to $36 today. The answer is plainly no. BG’s shares hit 800p in January before Shell turned up and, at a conservative estimate, might trade at 700p today if the company was staring at an independent future. So Shell, in effect, is paying a 50% takeover premium with more than a third of the bid in cash. Oil is a long-term business and assets aren’t available on demand. But, by any conventional yardstick, Shell is overpaying massively for BG. Borrowing target looks like a long shot There are still a few months left in the financial year, so it’s too soon to say the chancellor will miss his borrowing target. But you can understand why City economists don’t fancy his chances. The ambition is to limit borrowing for the year as a whole to £68.9bn, but after eight months the tally is £66.9bn. Put another way, the chancellor is aiming to borrow £20bn less than last year, but has managed only £6.6bn less after two-thirds of the race has been completed. At the current rate of progress, there would be a £10bn gap. Embarrassment if the target is missed would belong primarily to the Office for Budget Responsibility, which updated its projections only last month. The OBR, naturally, offered reasons why it may still be proved correct. Special factors were at work last month – there were no big fines to be collected from banks and the timing of a payment to the World Bank was rescheduled. More importantly, the new year is supposed to bring new cheer for the chancellor in the form of a surge in income tax from self-assessment payers and a pick-up in stamp duty on properties. What if that whoosh of receipts doesn’t materialise as advertised? In that case, the OBR’s credibility would suffer a heavy blow. It rowed against the City consensus when it projected that borrowing would fall by £20bn this year. If it is out by even £5bn, that is serious. More to the point, a miss would create a serious headache for George Osborne in his March budget. By late February – when the January borrowing data is released – the OBR will know whether its confidence is well-founded. If it is not, the chancellor’s ambition to achieve a budget surplus in this parliament will once again look fanciful. Fastjet: a good idea, but slow to take off A low-cost pan-African airline, modelled on easyJet and Ryanair? Terrific idea. The distances in Africa can be huge, the roads poor and the market is growing. What could go wrong? A lot. Backers of Aim-listed Fastjet – who include easyJet founder Sir Stelios Haji-Ioannou and big-name fund manager M&G – could be forgiven a weary groan as the company warned that revenues for this year and 2016 will be lower than anticipated. Fastjet has been buffeted by falling currencies and is now caught in the cross-breeze of disputed elections in Tanzania, home to its operational base; local bureaucrats, you see, aren’t flying so often. The deeper problem is that Fastjet is still concentrated in Tanzania. Africa – surprise, surprise – is not the EU and permits have not been granted as speedily as Fastjet had hoped. A Zambian operation is due to happen next year, belatedly. The net result is that Fastjet, despite raising £50m from investors in April, is now worth just £30m. Investors’ disappointment is understandable, but that valuation may be overdoing the gloom. The idea behind the business still sounds excellent, even if arrival is delayed by half a decade or so. |