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Introduction

The merger & acquisition case chosen for this research study is Royal Shell and BG Group acquisition. Royal Dutch Shell arrived as the 2nd largest energy corporation in 2016 after buying the BG Group for $53 billion (Katicic, 2020). The main purpose of the assignment is to analyze the acquisition of BG Group by Royal Shell company.

Royal Dutch Acquires BG Group

Figure 1: Royal Dutch acquires BG Group

Transaction rationale

The major strategic reason for Shell to buy BG Corporation was to procure the massive oil reserves of Brazil, laying emphasis on deeper water fields and liquified natural gas. Along with this, it also aimed at accomplishing merging of the oil marketplace in an effort to alleviate the reduction of the oil rates. This acquisition acted as part of the growth approach Shell to progress a highly intensive and simple operative pattern consisting of downstream and upstream engines, LNG (Liquefied Natural Gas) and deep water.

Synergies added for Royal Dutch Shell

Figure 2: Synergies added for Royal Dutch Shell

Shell company which is operating in over 70 nations wide across the world, experienced various issues as a consequence of its business methodologies, operational environment and technology (Whitehouse & Healey, 2015). The company had issues that include its business in Nigeria, where it was the victim of oil pilferage and theft, resulting in huge setbacks. Its Arctic Venture, where it faced technical complexities along with issues with local environmental conservation clusters, and US shale operational procedures, where Shell acquired no returns despite substantial investments. The acquisition contract is specifically significant for the Shell company as it boosts the position of the corporation in LNG, deep water assets and Brazilian oil business, turning it into the chief overseas oil corporation in Brazil.

This acquisition has improved the deep asset and LNG portfolio of Shell, specifically in Brazil and Australia. It allowed the corporation to hasten and de-risk its deep water and LNG-focused approach.

Diversification (Grabbing LNG Market) – Shell presently has over 75% of its oil yield and retail range. Whereas, in BG Group, Natural Gas depicted over 70% of the complete output (Lucas, 2021). Shell, a foremost company in worldwide LNG and deep water, expected that the union of these two firms will fetch on the two possible commercial lines of British Gas. In LNG Marketplace, Shell will acquire admittance to the strengths of BG. It has also anticipated that with the acquisition of BG, its market outline as the largest gas and oil firm in Europe will get enhanced and its approach to enlarge in such fields will be reinforced.

Shell+BG Combination

Figure 3: Shell+ BG combination

Economies of scale – Shell has thought that it will save around $3.5 billion in yearly expenditures in extents of administrative, corporate and IT processes by 2018 and allow the corporation to raise the overall gas and oil output by over 20%. The savings of cost in logistics and shipments would also comprise the procurement cost and offering in Brazil. Moreover, the corporation assumes significant cost saving in areas of gas and oil plants for exploration, drilling and upkeep.

Furthermore, it was assumed that BG has first-class reserves but it could not utilize them optimally. Shell could syndicate this to fetch business understanding to the table and further enhance and leverage it through the combined group. The stockholders of BG Group acquired 383 pence in cash in addition to 0.4454 Royal Dutch Shell B shares for each share of BG Group.

Royal Dutch Shell acquired the BG company by paying $19 billion as cash payment and over $35 billion value of shares in exchange for all the stocks of the BG Corporation (Urmal, 2017).

Aftermath

This M&A could be considered as a success as Shell was able to deliver effective cash flow performance in spite of the tough macro headwinds it encountered. The purpose of Shell was to control progress collectively with cleaner and more energy solutions. The company believed that the cumulative values of living for the growing global population are probable to endure to drive greater energy demand, consisting of gas and oil, for several years to arrive. Shell was having the following tactical intentions –

  1. To offer a global class case of investment. It involves rising free cash flows and raising returns of shareholders, all formed upon a stronger financial agenda and strong portfolio.
  2. To flourish in the changeover of energy by making a due response to the desire of society for convenient, cleaner and viable energy
  3. To sustain a stronger societal license to function and lead a positive influence towards society through its actions.

2019 after the acquisition year of 2016, was considered a year of progress in respect of its three strategic ambitions. Initially, it was derived from lower gas and oil prices. The average oil rate was $71 per barrel in 2018 and it got reduced to $64 per barrel in 2019. Moreover, Shell has observed weaker fiscal activity influencing margins, specifically in refining, and most particularly in chemicals (Kumar et al., 2019). In spite of such impacts, the cash flow from processes in 2019, excluding the actions in working capital, was over $47 billion. This converted to over $26 billion in terms of free cash flows.

Both companies were able to realize their respected anticipated economic and financial gains. The shareholders of BG grabbed 19% of the new company and Shell’s free cash flows increased to the level that it became able to distribute a dividend of $15.2 billion in 2019. Shell sustained the $25 billion share buyback package that began in July 2018. The total sum of $14.1 billion of shares was bought back in 2019. This led to more than $25 billion in total revenues to the stockholders in 2019 via share buybacks and dividends (Kalam, 2021).

The Shell company has integrated the BG Group properly. With the acquisition of BG, Shell is forming on such ground, totaling to prevailing missions in areas like Australia and Trinidad (Barcelona & Barcelona, 2017). The deal with improve the portfolio as well, with gas discoveries of BG Group off Tanzania in East Africa, the upcoming area of growth where Shell has not been able to form a position. Both corporations are placed to advantage from the shale gas affluent in the US. BG has an agreement to procure LNG from a firm known as Sabine Pass located on the Gulf of Mexico, possessed by Cheniere Energy. Shell was interested in a facility premeditated for an island off Georgia.

It has been analyzed that Shell has overpaid for the attainment of BG Group. Shell has announced a $69 billion bid to acquire the UK-based oil multinational. The shareholders of BG Group owned over 19% of the new corporation. However, Shell has not suffered financially as the outcome of the transaction. The deal has led Shell to create a corporation with over 25% more proved gas and oil reserves as compared to what Shell solely now has. And it will improve about 20% to production and offer Shell new, immature gas and oil projects, specifically in Brazil, Australia and East Africa.

Viewpoint

The corporation acquisition depicts a competent approach for corporate growth and novel streams of revenue that can enhance the bottom-line effectiveness. From raising access to the market and decreasing competition in the market to enhancing performance and bringing down the costs of production, various M&A benefits in making a consolidated, lucrative and attractive prospect for corporations. The main objective of merger and acquisition is to apprehend economies of scale and economic gains (Ray, 2022). It becomes possible when two companies being involved in M&A are productive, stronger and more competent together than apart. Firms combine to acquire advantages such as augmented admittance to capital, healthier bargaining power in the market, lesser costs leading from higher production volume and several more.

The combined version of a corporation can exploit the increasing request for natural gas, a comparatively abundant clean burning fuel. Previously BG-Shell has over 16% of the global LNG marketplace. The acquisition has created the main autonomous manufacturer of LNG in the world. LNG is regarded as natural gas, typically methane that has been transformed to a liquid version by means of a super cooling system and BG has know-how in that.

References

Barcelona, R. G., & Barcelona, R. G. (2017). Acquire or Build. Energy Investments: An Adaptive Approach to Profiting from Uncertainties, 335-356.

Kalam, K. K. (2021). The Effects of Mergers & Acquisitions on Financial Performance: Case Study of Acquisition of BG Group by Royal Dutch Shell. Open Access Library Journal8(3), 1-21.

Katičić, M. (2020). The acquisition of BG Group by Royal Dutch Shell (Doctoral dissertation, University of Zagreb. Faculty of Economics and Business. Department of Organization and Management).

Kumar, B. R., Kumar, & Amboy. (2019). Wealth Creation in the World's Largest Mergers and Acquisitions. Springer International Publishing.

Lucas, A. (2021). Investigating networks of corporate influence on government decision-making: The case of Australia’s climate change and energy policies. Energy Research & Social Science81, 102271.

Ray, K. G. (2022). Mergers and acquisitions: Strategy, valuation and integration. PHI Learning Pvt. Ltd.

Urmal, A. P. C. (2017). The acquisition of BG Group by Royal Dutch Shell: the largest liquefied natural Gas company In the world (Doctoral dissertation).

Whitehouse, K. & Healey, J.R. (2015). 5 key things about Shell-BG oil merger. Retrieved from https://www.usatoday.com/story/money/business/2015/04/08/five-things-shell-bg-merger-important/25452559/

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