By Dmitry Zhdannikov and Karolin Schaps
LONDON (Reuters) - Royal Dutch Shell agreed to buy smaller rival BG Group for 47 billion pounds ($70 billion) in the first major energy industry merger in more than a decade, closing the gap on market leader U.S. Exxon Mobil after a plunge in prices.
Anglo-Dutch Shell will pay a mix of cash and shares that values each BG share at around 1,350 pence, the companies said. This is a hefty premium of around 52 percent to the 90-day trading average for BG, setting the bar high for any potential counter-bid by a company such as Exxon, which has said it would also use the downturn in oil markets to expand.
The third-biggest oil and gas deal ever by enterprise value will bring Shell assets in Brazil, East Africa, Australia, Kazakhstan and Egypt. BG has some of the world's most ambitious projects in liquefied natural gas (LNG), where demand is growing as consumers turn away from more polluting fuels such as coal.
Shell is already the world's leading LNG company and it would get BG's capacity in LNG logistics - complex infrastructure that includes terminals, pipelines, specialised tankers, rigs, super coolers, regasification facilities and storage points.
"We are seeing a gasification of energy demand. Shell clearly recognise this," said Richard Gorry, director at JBC Energy Asia. "That said, Shell is still taking a big gamble because if the price of oil and gas doesn't go back up (in the next 24 months), I would imagine this might put them in a difficult position in terms of cash flow."
BOOST TO RESERVES
Shell said on Wednesday the deal would boost its proven oil and gas reserves by 25 percent.
Stitched together by Shell CEO Ben van Beurden and BG Chairman Andrew Gould, the tie-up follows a halving of oil prices since last June, putting a premium on access to proven assets rather than costly exploration. Record low interest rates have made it easy to raise cheap funding for big deals.
"We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with," Van Beurden told a conference call. "We have two very strong portfolios combining globally in deep water and integrated gas".
Britain's BG had a market capitalisation of $46 billion at Tuesday's close, Shell was worth $202 billion and Exxon, the world's largest energy company by market value, was worth $360 billion.
BG's bonds traded up strongly on the deal and its shares closed up 27 percent at 1206 pence. Shell shares fell 5 percent to 1982.5 pence. They were the most traded stocks across Europe on Wednesday, with $1.6 billion of BG shares changing hands and $3 billion of Royal Dutch Shell shares.
BG stock has tumbled nearly 28 percent since mid-June, when the slump in global oil prices began. The agreed price is around 20 percent above BG's share price of a year ago.
"In buying BG, Shell is making a bold strategic bet that oil prices will recover towards the $70-90 level in the medium term," said Henderson Global Investors. Brent crude was trading below $57 a barrel on Wednesday.
Barclays bank said Shell would have to persuade its shareholders that it can control capital spending at the new company and show BG's portfolio can deliver the promised growth options beyond Brazil, "something that, in our view, has been far from evident of late".
One source close to the deal said a counterbid was unlikely. The source said a U.S. company such as Exxon may be doubly wary of getting into a takeover battle after the failure of drugmaker Pfizer's attempted takeover of AstraZeneca last year.
The deal represents a windfall for Shell's adviser Bank of America Merrill Lynch. BG's advisers are Goldman Sachs and the smaller Robey Warshaw.
BAML has underwritten a 3.025-billion-pound bridge loan that will be syndicated to other banks and is expected to be taken out by a capital markets raising, according to the offer documents.
OIL PRICE IMPACT
With BG, Shell would be the leading foreign oil company in Brazil. Analysts at investment bank Jefferies said they now expected Shell to surpass Exxon as the world's largest publicly traded oil and gas producer by 2018, with output of 4.2 million barrels of oil equivalent per day.
Global LNG production was 246 million tonnes last year. The new Shell-BG group would have 18 percent of world output.
Van Beurden said the presence of two large players in Australia, Brazil and China and the European Union might require a detailed conversation with anti-trust authorities, but was unlikely to lead to forced asset sales.
The halving in crude prices has created an environment similar to the turn of the millennium, when large mergers reshaped the industry. Back then, BP acquired rivals Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.
"A deal of this size would certainly be getting everyone interested in running the ruler over potential combinations in the natural resources sector," said Paul Gait, an analyst at Bernstein Research.
But some industry watchers were reluctant to predict another flurry of mega-deals, saying many oil majors cannot afford to put stretched balance sheets under further pressure.
"If you're looking to the next big deal, Exxon Mobil stands out as most likely to pull the trigger," said Wood Mackenzie. "But don't expect a wave of late '90s-style consolidation."
Shell has long been seen as a potential buyer thanks to its healthy cash flow and relatively low oil price breakeven.
The deal, which should generate pretax synergies of around 2.5 billion pounds per year, will result in BG shareholders owning around 19 percent of the combined group.
Last year, BG Chairman Gould hired CEO Helge Lund from Norway's Statoil to turn around the company. Gould said on Wednesday Lund would remain the CEO through the transition.
However, it was evident the deal was driven by Van Beurden, who took over as the CEO last year, and Gould, a veteran executive who previously ran oil services giant Schlumberger.
"I called Andrew up and we had a very good and constructive discussion about the idea and it very quickly seemed to make sense to both of us," Van Beurden told a conference call. "What has happened in the last month, apart from it being a logical deal, it has also become a very compelling deal from a value perspective,"
($1 = 0.6693 pounds)
(Reporting by Narottam Medhora and Sai Sachin R in Bengaluru; additional reporting by Greg Roumeliotis and Denny Thomas, Henning Gloystein, Karolin Schaps, Kate Holton, Chris Mangham, Freya Berry, Silvia Antonioli and Vikram Subhedar; writing by Denny Thomas and Tom Pfeiffer; editing by Keith Weir and David Stamp)