– BG Group plc (BG/ LN): After we highlighted the importance of a positive ISS recommendation yesterday, it was widely reported that ISS has now given its support for the (compelling strategic) transaction (ignoring the short term crude price weakness/volatility). Although ISS is understood to be advising only 5%, the backing by ISS could represent significant positive momentum in gaining 50% Shell approval in 3 weeks. Furthermore, Shell is stepping up its charm offensive convincing larger shareholders like BlackRock and Capital Group stating that the deal will not compromise its dividend in a lower oil price environment as the deal can work even if oil prices average $50 a barrel for two years and a as it plans to cut capital spending further below the planned $35 billion for 2016, delay share buybacks and extend scrip dividends. Spread has now tightened more than GBp 30 to below GBp 70. Main and only real remaining risk to deal now is (public) negative stance by Capital Group (and obviously crude not further cratering towards $20 in next 2 weeks). Remains core position.

Updated public shareholder stance: 

Understood to be in favour: Allianz Global Investors, Old Mutual, Qatar Investment Authority, Henderson, Aberdeen Asset Management, AXA Investment Managers, Artemis Global Energy Fund, Rathbones, Brewin Dolphin

Understood to be against: Standard Life Investments, Jupiter Fund Management, Smith & Williamson

Largely unknown: Capital Group

– Home Retail Group (HOME LN): Consensus is building that Sainsbury’s will be successful in its pursuit of Home Retail, with an improved GBp 140-160 cash and shares offer. Although PE is increasingly being mentioned as a potential interloper, we are slightly sceptical of PE being able to trump any bid by Sainsbury’s. Although we still like the situation and believe the base case end game will be a recommended cash and shares offer in the GBp 150-160 range, we also believe there is a bit of complacency with Home Retail trading at GBp 140 pricing in almost 75% probability of a recommended transaction (after allowing for 2% spread on recommended deal with about GBp 110 downside). Would buy in GBp 130s. 

– Melrose Industries plc (MRO LN): Widely anticipated that Melrose will be removed from large number of indices (EUROSTOXX and FTSE) with larger selling pressure by the end of January given Melrose’s £2.4bn capital return set for 27/28 January 2016 representing more than 80% of Melrose’s current equity capitalisation. Attractive situation to monitor in anticipation of Melrose’s next deal announcement.