BP bid: is takeover talk credible and how might it rank against other FTSE 100 bids?

Shell buying BP is second only to a bid for ITV as the perennial takeover talk that won’t go away. The fact rumours keep circulating might suggest there is some truth in the matter, be it Shell or someone else looking to buy the UK oil and gas producer.

This is a difficult one to call. All big companies will look hard at any acquisition opportunities in their sector that could greatly increase their size and scale. Ultimately, it comes down to price and whether the rewards outweigh the risks.

Shell says it hasn’t been actively considering an offer, but that doesn’t mean it won’t do so in the future.

Would Shell want to own BP?

Shell might fancy owning certain BP assets, particularly if it can acquire them at a good price. Owning the whole company is another matter. Shell is sitting in a good place without having to resort to more M&A and the CEO has already implied that buying back shares is a better use of the company’s money than buying BP.

It is riding high from having a tight strategic focus and reaping the benefits of buying BG a decade ago, giving it an enviable position in LNG. In a recent strategy update, it pledged to hand out a greater percentage of its growing stream of cash flow to shareholders and find more ways to save money in the business and reduce capital spending.

Shell might have the financial muscle to make big acquisitions but it’s already done one huge deal and may not want to risk doing another. Most so-called ‘transformational deals’ destroy, not generate, value for the buyer. Cost synergies often fall short, there can be cultural clashes, and integration can be complicated and messy.

Would Shell’s shareholders support the acquisition of BP?

Shell might struggle to get all of its large shareholders on board to support a takeover of BP. Investors might not welcome the acquisition of a messy company and it would make Shell a higher-risk investment.

There might be several years of management distraction on integrating the business and finding buyers for any inherited assets that are deemed non-core. Investors might simply take the view that Shell is already well-served by its current assets and a BP takeover would give it indigestion.

Is BP a credible takeover target?

BP is an obvious takeover target in the oil and gas sector due to its relatively cheaper valuation versus peers, a muddled strategy that has seen the business lose its way, and the presence of an activist investor pushing for change. It looks like a sitting duck.

Someone else could come in, buy assets cheaper than developing similar ones organically, and put the company back on track.

BP's recent strategy reset didn't go quite as expected as its green credentials weren’t ditched entirely. The company ended up pleasing nobody, not going far enough for those who wanted a total U-turn with the oil giant's renewables interests hived off and potentially sold but also frustrating those who feel BP still needs some sort of energy transition strategy.

Shell is already streets ahead of BP in putting clean energy projects at the back of the queue and focusing on fossil fuels. Its strategic focus on gas is also helpful, given this could be an important energy source as the world looks to wean itself off more polluting fossil fuels like oil and coal.

Who else could buy BP?

If Shell doesn’t move on BP, there’s a good chance someone else will. In either situation, the UK government is going to have a lot to think about.

Shell buying BP would keep the energy giant in British control but could result in big job losses which is a bad look for a government trying to revive economic growth. An overseas entity buying BP might cause a political stir around one of the country’s biggest energy players falling into foreign hands.

Saudi Aramco, ExxonMobil, Chevron, TotalEnergies or a private equity consortium could feasibly be interested in all or some of BP, but foreign trade players in particular could come against significant opposition from the UK government and regulators.

How would a BP takeover compare to other FTSE 100 bids?

BP is currently valued at £57 billion. Applying the 36% average bid premium seen on London-listed stocks so far this year implies a potential takeover valuation of £78 billion. That would represent one of the biggest takeovers of a FTSE 100 company in history.

Previous mega takeovers of FTSE 100 stocks include Shell buying BG for £47 billion in 2015, Softbank buying Arm for £24 billion in 2016 and Kraft Foods buying Cadbury’s for £11.5 billion in 2010.