Shell offers 50 percent premium to buy BG for $70 billion

By Dmitry Zhdannikov and Karolin Schaps

LONDON (Reuters) - Royal Dutch Shell agreed to buy smaller rival BG Group for $70 billion in the first major oil industry merger in more than a decade, closing the gap on market leader U.S. ExxonMobil 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 energy companies said on Wednesday. This is a hefty premium of around 52 percent to the 90-day trading average for BG, setting the bar high for any potential rival bidders.

The biggest merger this year will give Shell access to BG's multi-billion-dollar operations in Brazil, East Africa, Australia, Kazakhstan and Egypt. These include some of the world's most ambitious liquefied natural gas (LNG) projects.

Stitched together by Shell CEO Ben van Beurden and BG Chairman Andrew Gould, the deal comes after oil prices halved since last June, putting a premium on access to proven assets rather than costly exploration.

"We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with," Shell's Van Beurden told a conference call.

"We have two very strong portfolios combining globally in deep water and integrated gas".

Shell said the deal would boost its proven oil and gas reserves by 25 percent. The firm also plans to increase asset sales to $30 billion between 2016-2018 on the back of the deal.

Britain's BG had a market capitalisation of $46 billion as of Tuesday close, Shell was worth $202 billion while Exxon, the world's largest oil company by market value, was worth $360 billion.

BG shares leapt 37 percent for 1,250 pence, while Shell's were down 2.2 percent at 2048 pence by 0905 GMT. BG shares have tumbled nearly 28 percent since mid-June, when the slump in global oil prices started.

COMPETITION ISSUES

Van Beurden said the presence of two large firms 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 on the back of a shale oil boom in the United States and a decision by Saudi Arabia not to cut production has created an environment similar to the turn of the century when many large mergers took place.

Back then, oil major BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.

Shell has long been seen as a potential purchaser thanks to its healthy cash flow and relatively low oil price breakeven.

The company was able to maintain capital and operating expenses and pay dividend at a price of oil of around $75 per barrel without borrowing too much money. However, BG's breakeven is as high as $145 per barrel, according to analyst estimates.

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 transition.

However, it became evident on Wednesday the deal was done by two people -- Van Beurden, who took over as the CEO last year - and Gould, a veteran executive who previously run 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 last month, apart from it being a logical deal it has also become a very compelling deal from a value perspective," he added.

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.

"We fully understand the strategic drivers of the transaction, and believe the fit an excellent one for Shell," analysts from Jefferies said.

"The imperative now becomes for management to convince the market of the financial implications: near term earnings dilution; a significantly more levered balance sheet; and a higher priority for debt reduction versus dividends on cash utilization," they added.

Shell is being advised by Bank of America Merrill Lynch, while BG's advisers are Goldman Sachs and Robey Warshaw.

(Reporting by Narottam Medhora and Sai Sachin R in Bengaluru, Additional reporting by Greg Roumeliotis and Denny Thomas, Henning Gloystein, Karolin Schaps and Kate Holton; Writing by Denny Thomas; Editing by Bernard Orr, Edwina Gibbs and Keith Weir)