Shell will pay a premium of around 50 per cent on BG’s shares, which closed up by 6.74 per cent at 910.40p yesterday, giving it a market capitalisation of £31bn.
BG’s board have recommended the offer of 383 pence in cash and 0.4454 Shell B shares, noting the “attractive premium and a substantial cash return” for shareholders.
“The BG Board remains confident in BG's long-term prospects under the leadership of Helge Lund. Shell's offer, however, allows us to accelerate and de-risk the delivery of this value,” said BG chairman Andrew Gould.
BG shareholders will own a 19 per cent stake in the combined company and will benefit from Shells dividend, which it confirmed today as $1.88 per ordinary share for 2015 and “at least that amount” for 2016.
The share issuance by Shell will be offset by a $25bn share buyback programme in 2017.
"Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us,” said Shell chief Ben van Beurden.
A merger between the two creates the biggest company on the FTSE. Goldman Sachs and Robey Warshaw are advising BG on the deal, while Bank of America Merrill Lynch is advising Shell.
The new combined group is to be led by Shell boss Ben van Beurden, while BG’s chief executive Helge Lund will leave the business. Lund, who was previously boss of Norwegian firm Statoil, has only been in the top role at BG since early February.
After his appointment was announced last October, BG faced a storm of criticism over Lund’s proposed pay package. Its original plan would have seen Lund earning up to £25m in his first year, however this was whittled down to £18m due to the prospect of a shareholder revolt.
The first approach was made by Shell after Lund joined. However, the company had been working on the numbers for three months prior to that, City A.M. understands.
Analysts have long pointed to BG as a potential target for takeover, and last night, Hydrocarbon Capital’s Malcolm Graham-Wood told City A.M. one of the main attractions is the fact that the group could potentially be broken up for a series of asset sales. He also said that Shell would be interested in taking on BG’s liquefied natural gas (LNG) operation – Shell has recently had to abandon several of its LNG projects.
BG reported a loss of $7.9bn (£5.3bn) for the fourth quarter of 2014, after being forced to write off $8.9bn in impairments as a result of the global oil price slump of the past nine months.
Meanwhile, Shell reported income of $595m for the final quarter of 2014, having initially overstated its results for the period by $178m.
Both companies announced cuts to capex for 2015 at the beginning of the year, alongside several competitors in the sector, reflecting a general trend in the wider oil and gas market.
Market commentators speculated that these moves would lead to a wave of consolidation as larger players took advantage of smaller, more vulnerable companies, and many pointed to Van Beurden’s assertion in January that Shell would take an “opportunistic” approach to deals.