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Shell still has to prove its BG Group takeover is a slick deal

As its £55bn purchase moves closer, falling oil prices mean Shell’s offer is less compelling than when first announced

Royal Dutch Shell has got the thumbs up from the European commission for its £55bn takeover of BG Group. That is two regulatory hurdles cleared, three to go. At that point, harder questions can be asked. Does this cash and shares deal, unveiled in early April, which feels like a different era for the oil market, still make sense? And will Shell shareholders back it?

The second question is easier to answer. Fund managers only squash big deals in extreme circumstances. Fred Goodwin and Royal Bank of Scotland, for heaven’s sake, received overwhelming backing in 2007 to buy the worst slice of ABN Amro even as credit markets started to turn icy.

At Shell, the chief executive, Ben van Beurden, has staked his reputation on the BG purchase and a rebellion would amount to a vote of no confidence in the board of one of the FTSE 100’s biggest companies. That drama, almost certainly, is not going to happen.

But there is always the possibility that Shell could choose to walk away and pay £750m as a break fee. At today’s $49 (£32) for a barrel of Brent crude, the acquisition arithmetic looks less than compelling. At announcement in April, the takeover premium for BG was 50%, a price that seemed to make sense only if the oil price rebounded to $70 to $90 a barrel in reasonably short order. Indeed, Shell seemed to concede that point in the early days. Only later has the company argued, less than convincingly, that the numbers still work at current prices.

BG shares are trading almost 13% below the value of Shell’s terms, reflecting nervousness among its investors. Adjust for Shell’s to-be-paid dividends and the gap is closer to 11%, calculates Barclays, but that is still hefty for a deal due to complete in the first quarter of next year.

Barring another sustained fall in oil prices, Van Beurden is probably safe to plough on. But this purchase looks a long way from being the opportunistic piece of deal-making, which was the spin in April. One third of takeover price is cash and, make no mistake, a 50% takeover premium is hard to explain if it turns out you were not negotiating at the bottom of the market. It is too soon to say the deal is in trouble, but it is a long way from being done.

Costly dividend weighs down Glencore

For what feels like the umpteenth day in a row, the worst-performing FTSE 100 stock was Glencore. Yesterday’s 8% fall to a new low of 123p means Ivan Glasenberg’s mining-cum-trading combine has lost a quarter of its stock market value since half-year figures a fortnight ago.v Back in 2013, Glencore was worth $65bn when it completed its takeover of Xstrata; now it is valued at $25bn. Viewed another way, the shares are 77% lower than 2011’s flotation price. Whatever Glasenberg is telling investors during his current post-results roadshow about his flexibility to cut debts of $47bn (or $29bn if one deducts trading inventories), it is not working.

A bearish industry-wide note from Bank of America Merrill Lynch’s analysts has not helped. The number-crunchers reckon about $60bn is required to reinforce balance sheets in the sector. In Glencore’s case, they calculated the shares are worth 42p at current spot commodity prices, and zero under a “doom and gloom” scenario.

An alternative view is that Glencore’s debt mountain would look a lot less daunting if the prices of coal and copper, the company’s two big products, rebound only modestly. That script, though, would seem to require a pickup in demand from China. Unfortunately, even Glasenberg, famed for his market-reading nous, offered little clarity on that score a fortnight ago.

“At the moment none of us can read China,” he said. “None of us know what is going on there and I’m yet to find the guy who can predict China correctly.” Instead, his report contained a long grumble about the “aggressive and synchronised” short-selling tactics of Chinese funds in the copper market.

Full marks for frankness. But, as one fund manager points out, why on earth, in these circumstances, would you simultaneously maintain a dividend that costs $2.2bn a year?

Walkie Talkie – the ugly truth

The Walkie Talkie, the hideous bulging office block on Fenchurch Street in the City of London, richly deserves its award of the Carbuncle Cup for worst building of the year. The belated addition of shading devices now prevents cars and pedestrians from being fried on sunny summer days. But nothing can stop the Walkie Talkie ruining the City skyline and, disgracefully, dominating views of Tower Bridge. What were City planners smoking when they granted building permission?

By way of small compensation, let’s hope the Carbuncle Cup injects a dose of humility into the boardroom of Land Securities, which developed the monstrosity with Canary Wharf Group. The front page of last year’s annual report was embossed with the gushing opinion of a tame tenant: “Our people felt a foot taller the day we moved in.” Dear Land Securities, the rest of us hate the Walkie Talkie – and the tower has destroyed any claim you had to being a sensitive developer.

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