Investors skeptical of Shell’s $ 70B deal

The biggest deal in Royal Dutch Shell’s history failed to win over many investors who worry the $ 70 billion price tag is too high and could imperil their dividend.

While the cash- and- shares purchase of BG Group Plc will make Europe’s largest oil company the preeminent player in global natural gas and add enormous fields in Brazil, it’s not expected to boost earnings per share until 2017 and relies on a quick rebound in crude to about $ 90 a barrel to ensure success.

The shares being used to buy BG fell the most since 2008 on Wednesday even as Shell chief executive Ben van Beurden sought to woo investors by promising cost savings of $ 2.5 billion and a $ 25 billion stock buyback.

“To assume Shell can pay a 50 per cent premium for BG, and extract significant synergies, deliver value for shareholders and maintain a dividend on an expanded shareholder base would require a morethan-healthy degree of optimism,” said Michael Hulme, commodities fund manager at Carmignac Gestion.

Shell’s dividend, which accounts for about 10 per cent of the total payout to U. K. equity investors, is a concern, says Henderson Global Investors, which owns Shell shares.

“Shell is taking on more risk and is issuing more shares and also paying out cash to BG shareholders,” said Matthew Beesley, Henderson’s global head of equities. “And this potentially puts some strain on the dividend as they redirect cash flows to paying down debt ahead of growing the dividend.”

The deal will dilute earnings per share by 7.1 per cent in 2016, according to Bloomberg Intelligence, which said the rationale for the merger depended on a rebound in oil prices. The management’s forecast of cash flow for the combined company was based on oil averaging $ 90 a barrel in 2018.

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, is betting liquefied natural gas will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on Wednesday.

The acquisition will make Shell the dominant global LNG company, and gas is a “very important” component of the deal, he said.

Buying BG also brings Shell, based in The Hague, a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allows more participation in the U. S.’ s emergence as an LNG exporter.

Shell management met investors to persuade them the long- term benefits of the deal outweighed the immediate financial burden. Some fund managers were receptive.

“It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell,” said Michael Clark, portfolio manager at the Fidelity MoneyBuilder Dividend Fund.