Shell buys BG: what does it mean for shareholders?

Shell has announced a £47bn takeover of rival BG, taking advantage of a lower oil price to buy high-quality reserves and a strong position in the liquefied natural gas business. Both shares are widely owned by individual investors - BG has around half a million retail shareholders - and big UK equity funds. We look at the key issues.

Why is Shell buying BG?

All big oil companies face a struggle to replace their existing production with new reserves. But as oil prices (and share prices) have fallen, buying new reserves has become more attractive than finding them.

"Having bet enormous sums on eye-wateringly expensive oil production from oil sands, ultra-deep water and Arctic fields, the supermajors are now ill-placed to cope with a low oil price," said Pascal Menges, manager of the Lombard Odier Global Energy Fund.

Other deals are likely. "We expect this to be the beginning, not the end, of this trend," said Duncan Goodwin, manager of the Baring Global Resources fund.

Is a rival bid likely?

Probably not. Exxon is the only other potential bidder. "You can't completely rule out a counterbid but we think the premium is sizeable enough to fend off any other suitors," said Will Riley, co-manager of the Guinness Global Energy Fund.

What do analysts and fund managers think of the deal?

Broadly, they think it makes sense. "It turns Shell into the biggest independent natural gas producer in the world, with the resources to fully exploit BG's vast fields in east Africa, Brazil and Australia," said Ian Forrest, equity analyst at the Share Centre.

Mr Riley said the strategic fit was good, staking Shell's future on deepwater and LNG rather than "unconventional" oil like shale and tar sands. "But this deal is predicated on $90 oil. I agree with that view, but as an owner of Shell equity I'd like a greater margin of safety."

I own BG shares. Will this trigger a capital gains tax liability?

You could be liable for CGT on the cash element of the deal if the amount you receive is more than £3,000, or exceeds the original cost of your shares. Since the cash consideration is 383p per BG share, holdings above 783 shares could generate a chargeable gain.

That gain is calculated by applying the cash proportion of the acquisition price to the original cost of the shares. Based on Shell's price on April 7, the cash element accounts for 28 per cent of the total, so the chargeable gain will be your total BG holding, multiplied by £3.83, minus 28 per cent of the shares' original cost. The exact proportions will not be known until the deal completes, because Shell's share price will vary.

If you own BG shares as a result of owning British Gas stock, you may need to rebase your original purchase cost to take account of the many capital events such as demergers over the subsequent years. There is a table of base costs" on the BG website and a spokesperson for the company said the full documentation would include more detail on the tax implications.

You can make up to £11,100 of capital gains in the current tax year before becoming liable for CGT.

There is a "mix and match" facility. What is this?

BG shareholders can express a preference for more cash and fewer shares. But higher cash allocations will only be granted if other shareholders ask for less cash and more shares.

Investors can also ask to receive Shell's A-shares, but these pay dividends in euros with Dutch withholding tax deducted, so most UK investors hold the B-shares.

I own Shell shares for income. Will this deal limit its dividend-paying capacity?

Financial strength has long been a characteristic of Shell, whose debt is rated AA by Moody's - better than many sovereign countries.

However, its finances will become more stretched as a result of the transaction. "This potentially puts some strain on the dividend as they redirect cash flows to paying down debt," said Matthew Beesley, head of global equities at Henderson.

The company has pledged that 2015 dividends will be unchanged at $1.88 per share, and that payouts could grow in 2016.

How big will the combined company be?

Enormous. Add the two market capitalisations together and Shell becomes the largest company on the London stock market by some distance. It would account for 9 per cent of the FTSE 100 and around 7.5 per cent of the All Share.

Will that cause problems?

It could do. European rules ("Ucits") preclude actively-managed funds from holding more than 10 per cent in any one share, so would be very difficult for a fund manager to hold an "overweight" position in Shell. However, Laith Khalaf at Hargreaves Lansdown pointed out that only 4 per cent of active managers currently hold a position in Shell that is bigger than its weight in the index, and six out of 10 managers do not hold the shares at all.

Tracker funds have more flexibility and can hold up to 20 per cent in one company. However, so much concentration in a single stock raises risk levels. "We need to be aware that 17 per cent of All Share dividend income is oil and gas related," said Mr Beesley, adding that another 7 to 8 per cent of income comes from large mining companies.

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