Image copyright AP

Royal Dutch Shell says it has agreed to buy oil and gas exploration firm BG Group in a deal that values the business at £47bn.

The two firms say they have reached agreement on a cash and shares offer which gives investors a 50% premium on BG Group's share price on 7 April.

The deal could be one of the biggest of 2015 and could produce a company with a value of more than £200bn ($296bn).

BG Group's shares opened up 42% on the London Stock Exchange at 1,293.5p.

Shell's £177bn market capitalisation dwarfs that of BG, which now stands at £31bn after a 20% fall in its share price over the past year.

Dividends

BG Group is the UK's third largest energy company, and currently employs about 5,200 people in 24 countries.

It was created in 1997 when British Gas demerged into two separate companies: BG and Centrica.

BG took control of exploration and production while Centrica took charge of the UK retail business of the former British Gas.

In 2000, BG split into BG Group and Lattice Group.

Shell said BG Group shareholders would enjoy higher dividends, as it confirmed its intention to pay its existing shareholders $1.88 per ordinary share this year.

That compares with a dividend of just $0.14 that BG Group shareholders can expect to receive this year.

The oil giant also said it expected to commence a share buyback programme in 2017 of at least $25bn.

Shell said it would also provide BG Group shareholders with a "mix and match facility", allowing them to vary how much they receive in cash and new Shell shares.

Shell and BG Group expect to make annual savings of $2.5bn following the deal.

But Shell chief executive Ben van Beurden said he remained committed to North Sea oil and expected to invest £4bn between 2016 and 2018.

Shell said the deal would also add 25% to its proven oil and gas reserves and 20% to production capacity, particularly in Australia's liquid natural gas (LNG) market and in deep water oil exploration off the Brazilian coast.

BG Group shareholders will own approximately 19% of the combined group following the deal.

Image copyright BG Group

BG Group history

BG Group's roots go back to the 1950s, when it was part of the UK's Gas Council and then British Gas.

British Gas was privatised in 1986.

In 1997 British Gas was demerged into two separate public companies: BG and Centrica.

BG took charge of exploration and production as well as its British transmission and distribution business Transco.

Centrica took over the UK retail business of British Gas.

Another demerger in 2000 created two new public companies: BG Group and Lattice Group with Lattice inheriting the Transco business.

Following the second demerger in 2000, BG Group developed a portfolio of major gas assets, in key countries such as Egypt, Trinidad and Tobago, and Kazakhstan as well as the UK's North Sea.

Defensive merger?

The deal comes at a time of uncertainty for oil and gas companies. In the past six months the price of oil has fallen by about 50%. Meanwhile, analysts have warned that investment in North Sea oil exploration has all but dried up, threatening the entire industry.

Last month, the Chancellor, George Osborne, lowered the supplementary corporation tax levied against oil companies that operate in the North Sea.

BG Group warned in February that it would write down the value of its oil and gas assets by nearly £6bn ($9bn) due to the oil price slump.

Similarly, Shell announced in January that it would be cutting spending by nearly £10bn over the next three years.

As it announced the takeover bid, Shell said it expected to make asset sales totalling $30bn between 2016 and 2018, although it did not specify which assets it was reviewing for sale.

Asked about potential job losses in the North Sea, Shell and BG Group said they expected there to be "global synergies", while adding that if the deal had not happened, they might both have had to make job cuts.

Current BG Group chief executive Helge Lund, who took up the post last month, will remain with BG Group while the deal goes through, but is expected to leave once it is completed.

BG Group chairman Andrew Gould said the BG board remained confident in the energy firm's long-term prospects under Mr Lund, but that Shell's offer "allows us to accelerate and de-risk the delivery of this value".

Even so, the payout that Mr Lund is likely to receive, alongside the boost he will receive to his income from his BG Group shareholdings, could raise eyebrows.

In December, BG's board revised Mr Lund's proposed £12m upfront shares bonus, after shareholders and the Institute of Directors complained.

Good fit?

Analysts gave a mixed reaction to news of the deal. Investec analyst Neil Morton said a tie-up had "been mooted for about 20 years".

He added: "BG investors receive what we see as a compelling offer. For Shell shareholders, we are less convinced of the merits.

"The deal is predicated on a strong recovery in oil prices ($90 per barrel from 2018), while we suspect that Shell is pouncing on BG's imminent free cash flow to protect its burdensome dividend payout."

Christian Stadler associate professor of strategic management at Warwick Business School said BG would fit well with Shell's portfolio.

"Shell has a very good track record in offshore oil and gas fields, and BG will help them solidify this area," he said.

He added acquiring BG would help Shell's replacement ratio: the amount of oil fields Shell has lined up to replace the oil it is currently producing.

But he warned cost savings would be hard to achieve and "with the current downsizing in the oil industry you would expect some job losses".