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If Royal Dutch Shell Buys BP Should The Authorities Ban The Purchase?

December 8, 2014
There’s interesting (and fun!) rumors floating around the London market that Royal Dutch Shell might attempt to purchase BP . These sorts of mergers (or takeovers) aren’t unusual in a commodity business like oil at a time of weak prices. Indeed, BP itself was created in its present form by a very well timed takeover of Amoco at a time of low crude prices. Of course there’s specific details here: BP’s reliance upon Rosneft rather than any direct ownership in Russian crude is seen as something of a weakness, as is the still outstanding issues over the Macondo blow out. but the specifics aside the current oil price is rather lower than people expect it to be in the future so now might be the time to go drilling on the stock exchange rather than in the ground. The big and interesting question is whether the authorities would wave through such a deal.
Here’s the story swirling around:
“One of Britain’s oldest oil companies BP could be about to be sold to its biggest rival for a fiver per share.
The rumoured deal, if realised, would complete one of the most ignominious falls for the once great Persian Oil company that powered Britain’s Navy to victory during the First World War.
BP is now a sitting duck after the Gulf of Mexico disaster, Russian sanctions and the falling oil price combined to drive down the share price to £4.25. Analysts estimate the deal could be done if rival Shell offers a 16pc premium to that price, or about £5, to seal one of the biggest corporate takeovers in the history of the oil industry.
The rumours that surfaced earlier this week that Shell might be taking a closer look at BP are not that ridiculous and in the current climate of lower oil prices and falling profits they actually make perfect sense.”
Both companies are of course suffering from the effects of the falling oil price. But BP more than Shell as a result of those other factors. BP, as an example, only gets dividends from Rosneft rather than a share of either the revenue or production from those Russian interests. And given that the Russian oil majors are, to be polite about it, not quite as efficient as the western majors that’s worth rather less than it might be. And of course there would be an opportunity to cut out substantial expenses from a merged company, reducing the overhead that must be paid for by the combined production. And it does look like Shell could afford to do the deal even if it might have to make a rights issued to finance it (a stock offer might work instead but that’s to concentrate too much on the detail).
However, the obvious question would be whether the authorities would allow such a deal to go ahead. From the UK view there would be no problem in the sense of nationalism or anything. The UK government isn’t going to insist that BP must remain British, we’ve rather got over that sort of thing. And Shell has a dual UK/Holland structure anyway which makes it not really foreign. The question really would be about market size.
And here’s there’s conflicting evidence really, Of course, the combined company would be vast. Each company is, to be technical about it, humongous on its own. But simple size isn’t how anti-trust and monopoly law is supposed to work. That should be about market share: the size of the players with respect to the size of the market. And there, well, it depends upon how you define the size of the market.
If we think about the global market for oil production then the combined companies would have about 6%. That’s also half the size of Exxon and we could thus argue that a merger would increase competition. However, it’s also true that a substantial portion of that global production is in the hands of state owned companies (Aramco, PdV, the state influenced at least Rosneft and so on) and the combined companies would be a very much larger portion of the “free market” market as it were. And finally there will obviously be local issues. Perhaps in refining or distribution, where the combined companies could conceivably have 50% or more of certain local markets. But those local markets can be dealt with on a local basis, some local divestment being made perhaps.
Of course, this is all only rumor so far: at least some of the talk coming from the bankers who would love to collect the fees for advising on a deal of such scale. But assume that it does progress, how much would the idea be in danger of being stopped on those anti-trust grounds? That really depends upon how the regulators define the market. There would most certainly be conditions applied to certain local markets, as above, but the basic deal itself would likely be waved through.
By Tim Worstall
Source: Forbes

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