Shell/BG merger- what does it mean for funds and investors?

Royal Dutch Shell has announced a £47 billion (€65 billion) merger deal with BG Group, which would reportedly make the combined company worth 9% of the FTSE 100, if it goes through.

The deal, already touted to be the biggest of the year, could produce a company with a value of more than £200 billion (€276 billion).

Big cost savings would result from the merger with Shell and BG Group expected to save $2.5 billion (€2.3 billion) a year, following the deal.

The acquisition would also add 25% to Shell’s oil and gas reserves and a 20% boost to production capacity, with big gains in the Australian liquefied natural gas market and the offshore oil fields of Brazil.

For shareholders and fund managers, the deal could add an extra layer of complexity to investment structure. UK funds may have difficulty accommodating the size of the new enlarged Shell group, because of rules which limit a fund’s exposure to any one company.

“The new merged entity would be by far the biggest company in the UK stock market, and its size would present difficulties for some funds which invest in UK shares. In particular closet trackers and pension funds could eventually find themselves outside of their comfort zone in terms of their active position, unless they rejig the rest of their portfolio to look more like the index to compensate, or abandon their index-hugging philosophy,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

The new combined group after merger would make up around 9% of the FTSE 100, based on its current valuation, and around 7.5% of the FTSE All Share. This may in due course present a challenge for some pension funds and closet trackers, which manage their portfolios largely in line with the benchmark index, pointed out Khalaf.

“This is because regulations prohibit active funds from holding more than 10% of their portfolio in one company. While this is not a problem at current valuations, should the combined group breach 10% of the UK stock market, for instance on the back of an oil price recovery, these funds may find themselves having to sell Shell stock to comply with this rule,” he explained.