We believe we should tackle some of the comments and arguments put in the UK weekend press by Ian McVeigh, head of governance at Jupiter Fund Management, who attacked the proposed takeover of BG Group by Royal Dutch Shell, likening it to the disastrous purchase of ABN Amro by Royal Bank of Scotland in 2007, soon before the financial crisis.
We obviously appreciate some of his editorial scaremongering self-reflection on a very public forum, however we believe his comments should very limited resonance as:
a) Very limited ownership: Jupiter doesn’t show up in Shell’s shareholder register with any shareholding of substance (most likely own less than 1%).
b) Low approval threshold: Shell shareholder vote’s threshold to approve the deal is relatively low with only 50% required with a more passive and diversified shareholder register (top 2 shareholders BlackRock and Capital Research and Management own respectively 7.3% and 4%).
c) Questionable financial logic/numbers:
i) Wrong return calculation: McVeigh believes that BG deal would only generate a return of just over 4% (while putting 2015 operating profit of $2.8bn over paid BG deal value of $70bn) while we believe that one should start using 2016 operating profits while adding expected synergies (if we use consensus for 2016 operating profit of $3.9bn and discounting 2018 expected synergies of $3.5bn to 2016, we can get return of $6.7bn on deal value of about $69bn or return of almost 10%).
ii) Wrong notional bid premia: McVeigh believes that notional premium has actually increased since bid was announced – he states that 0n April 7 BG was valued at $43bn. vs a a bid worth $70bn, implying a premium of $27bn, and since then believes that bid premium has increased to $30bn as unaffected BGs value would be $32bn (after allowing 26% share price decline in line with comparables) vs current value of deal of $62bn (even though earlier in the article he states that current value of deal is $70bn) – however we believe his new bid premium calculation is wrong as unaffected BG value would be $42bn (26% price decline from GBP 8.53 = GBP 6.31 or $9.51 would imply deal/EV value of $42bn) vs deal value of $69bn, so we obtain current notional bid premium of $27bn (so not changed or increased).
iii) Lack of focus on synergies’ valuation/potential: Even if we would take the comments of bid premia of $27-30bn at face value, McVeigh seems to lose focus on comparing bid premia with potential for synergies – comparing his bid premia of $30bn on targeted synergies of $3.5bn would imply multiple of about 8.5x, which is not too exuberant in large oil & gas valuations.