Acquisition of BG Group by the Royal Dutch Shell Group

Acquisition of BG Group by the Royal Dutch Shell Group

Introduction

The Royal Dutch Shell Group is a product of the amalgamation of the Royal Dutch Petroleum Company of Netherlands, and the UK’s Shell Company specializing in Transport and Trade in the year 1907 (Setiawan 2018). Over the years, the Royal Dutch Shell Group has rapidly expanded through the acquisition of various companies across the globe, such as the 1970 acquisition of the Billiton mining company, which it later sold in the year 1994 to form part of today’s BHP Billiton (Setiawan 2018). The most recent acquisition made by the Royal Dutch Shell Group is the take-over of the UK’s energy giant, the BG Group, which is also one of the most notable acquisitions by the Royal Dutch Shell Group of all time.

The BG Group, which is currently a subsidiary of the Royal Dutch Shell Group, was founded in the year 1997 in Britain, as a transnational oil and gas firm. Subsequently, the company expanded its operations to about 25 countries across the world, with its daily production gashing to almost 680,000 barrels of oil (Hammond et al. 1985). However, the BG group was successfully acquired by the Royal Dutch Shell Group as a result of the low gas prices and the overall tumbling market of the energy industry products. The acquisition was completed on an agreed deal of $70 billion in cash and shares transaction (Kumar 2019). Before the purchase, the BG group’s shares were undervalued in the stock market due to the struggle in the troubled market at the time and the resultant low cash flows despite massive investments.

To date, the take-over of the BG group by the Royal Dutch Shell Group remains to be the most significant acquisition transaction in the oil and gas industry, and the subsequent successful command of the sales in the oil and gas market within the short timeframe after the take-over qualifies the Group for a comprehensive study topic of acquisition in this paper. The acquisition of the BG group was instrumental in transforming the strategic business success plan for the Royal Dutch Shell group in various ways, such as replenishing the reserves, reducing the initial production costs, and ensuring adequate coverage of the dividends, which in turn improves the overall financial profile of the firm (Catuneanu 2019).

Prior to the acquisition, the Royal Dutch Shell Group had an average revenue turnover of 6.2% for the previous five years and an average net income of approximately 1.1%. Also, the profitability analysis charter indicates that the group had an average stock profitability rate of 5.2% spread over the five years before the take-over (Kumar 2019). Immediately after the acquisition, the Group’s revenue declined by 11.8%, before increasing continuously up to 2019 as follows: 2016-2017 (29.93%), 2017-2018 (27.15%). However, the group registered a decline of 11.82% in 2018-2019 (Kumar 2019). Overall, the group has had a 2.21% decline in revenue since the acquisition (Kumar 2019). The immediate impact of the acquisition on the group’s long-term debt was a 57.04% increase, which was followed by a 10.99% and a 9.72% decline up to 2019 (Kumar 2019). The overall long term debt standing as of 2019 was 18.09% increase since the take-over.

The long-term objective of the take-over of the BG group by the Royal Dutch Shell Group was to find a solution to the challenge of the compensation of the depleted reserves at a convenient cost, which would create room for a sound return on investment (Kumar 2019). Also, the acquisition was beneficial to Shell Group as it helped the company to protect its commitment of not lowering its dividends as well as improving the company’s general financial profile. The acquisition is also projected to place the Royal Dutch Shell group at the top of the list of the highest growth firms for the coming half-decade (Catuneanu 2019). Although the immediate impact of the acquisition on the group’s overall performance is not all impressive, it is worth noting that the timing of the transaction was impeccable as Shell Group was able to secure a remarkable deal due to the present market crisis of the BG group at the time. Consequently, the acquisition has grown Shell’s proved oil and gas reserves by 25% and the production by 20%, while lowering the total cost of production due to the addition of new reserves and increasing the group’s exposure in Australia and Brazil.

References

Kumar, B.R., 2019. Acquisitions by Royal Dutch Shell. In Wealth Creation in the World’s Largest Mergers and Acquisitions (pp. 147-153). Springer, Cham.

Catuneanu, O., 2019. Scale in sequence stratigraphy. Marine and Petroleum Geology, 106, pp.128-159.

Setiawan, A., 2018. THE BEGINNING OF THE ROYAL DUTCH/SHELL AND STANDARD OIL COMPANY RIVALRY IN THE DUTCH INDIES 1865-1910. International Review of Humanities Studies, 1(1).

Hammond, E.M., Helm, D.R. and Thompson, D.J., 1985. British Gas: options for privatisation. Fiscal Studies, 6(4), pp.1-20.