Shell's pause on BP takeover gives all sides a useful breather

Times

a day ago

The swimming pool has gone from the basement at Shell Centre, the London headquarters of the FTSE 100 oil and gas company, as has the rifle range. The latter went about 20 years ago, while the pool was a casualty of the 2016 redevelopment of the sprawling South Bank site, which sits in the shadow of the London Eye. Some things don't change, however, and Shell staff would have heard the news this week that their employer had looked at buying BP with a shrug of the shoulders. Not that old chestnut again!
'Shell + BP = British energy behemoth' is an equation that has been chalked on many blackboards over the years, mostly those of eager investment bankers dreaming of enough fees to pay for an early retirement. Sometimes it has been more than just a dream. It came up during the oil-industry merger mania of the late 1990s, when the oil price dropped to $10 a barrel. John (now Lord) Browne raced off in a different direction, doing an astonishing string of deals including mergers with Amoco and Arco in the US and breaking into Russia with the creation of TNK-BP, a deal that two decades later still looms large in any discussions of BP's future.
Browne reportedly looked quite hard at the merits of a Shell merger just before he left in 2007 after falling out with his chairman, the late Peter Sutherland; the proposed deal added to the friction. This was later dismissed as 'scenario planning,' but Tony Hayward, Browne's successor, had to deny the pair were talking not long after he took the job. Hayward soon had other things to worry about: a fatal blowout on the Deepwater Horizon drilling rig in the Gulf of Mexico caused one of the world's biggest oil spills. That eventually cost Hayward his job and BP some $65 billion.
Now the deal is back on again — sort of. Bloomberg reported in May that Shell was looking at making a move and The Wall Street Journal said this week that the two companies were in early talks. Not so fast! Shell poured cold water on the whole thing with a statement to the stock exchange on Thursday saying 'it has not been actively considering making an offer for BP'.
You might think this means the bankers will have to rethink their early retirement plans, but that is not necessarily the case. Shell's statement means it is barred (by rule 2.8 of the City takeover code) from making an offer for six months. The rule, however, does not much restrict its room to manoeuvre. Shell can jump in if someone else makes a move on BP, if the board of BP agrees to a Shell approach, or if Shell can manage to convince the Takeover Panel, which polices the code, that there has been 'a material change of circumstances'. In reality, Thursday's statement means Wael Sawan, Shell's chief executive, is keeping his powder dry. He can sit back, do more work on whether a deal makes sense and has the option to get involved if a rival tries to beat him to the punch.
There are three good reasons for Sawan wanting to wait. First, he has only been chief executive for two years and is still working his way through his big internal transformation plan. The next stage, amalgamating what were separate technical divisions into the operating businesses, is due to kick off early next year. Complicating that shake-up with the integration of BP could be a nightmare and many big deals fail on the difficult nitty-gritty of merging two different company systems and cultures.
CHRIS DUGGAN
Second, the oil price may work in his favour. One of the surprises of the past fortnight is how muted the market's reaction was to the Israel-Iran hostilities and the American attack on Iran's nuclear facilities. Despite all the talk of $100 a barrel, the price hovered around in the mid-70s last week and dropped to $68 after Donald Trump 's announcement of a ceasefire. That suggests, as many analysts have pointed out, a well-supplied market, with the likelihood of lower prices should tensions in the Middle East ease. Lower prices makes life trickier for BP and has in past always been the catalyst for oil industry deals.
• Does it make sense for Shell to buy BP?
Third on Sawan's list is the Russia-Ukraine war. A ceasefire could help to push the price down and might also give some clarity on BP's Russian interests. It said three years ago it would get out of its 19.75 per cent stake in Rosneft (the legacy of Browne's TNK deal) but hasn't yet found a way to do it, leaving the shares in limbo.
The pause should also give ministers time to think about how they might react if the merger ever became a reality. Having an oil major based on home soil is extremely useful to governments for all kinds of reasons: advice on energy markets, intelligence from interesting parts of the world where the local BP or Shell manager might be better plugged in than the British ambassador, and head offices that provide hundreds of well-paid highly-skilled jobs and, sometimes, a lucrative stream of tax revenue.
Britain has been fortunate to have two, and it would probably not be too much of a blow if they united as one much larger entity. It would be a serious blow, however, if the merged company decided, as some multinationals have in recent years, that it would be better to have a primary share listing in the United States rather than the UK. Sawan has been asked about this in the past and given guarded answers, saying that Shell might have to look at 'all options' if US oil companies continued to attract a higher valuation than those listed in London. A shift across the Atlantic would be a grievous wound to the already struggling London stock market. On top of that would be the loss of jobs and all that intangible value oil and gas companies can quietly provide. Shell's six-month pause gives its management time to reflect on what to do next and the government time to work on plans to make sure that if a merger does happen the combined company stays here.