Where are Shell’s animal spirits for a BP deal? 

AFTER you. No, after you. Please, you go, I insist.

Shell is evaluating a potential acquisition of BP, Bloomberg News reported on May 3. But it’s waiting to see if BP’s share price falls further or another suitor emerges. Whatever happened to animal spirits?

BP is vulnerable following a fall in its market value since early 2023 and recent stake-building by activist Elliott Investment Management. Shell is but one obvious possible acquirer. Exxon Mobil, Chevron, TotalEnergies and Abu Dhabi National Oil Co have also run the numbers, the Financial Times reported on Friday (May 9). Maybe all the oil majors’ chief executives are thinking the same way: I’m not sure this makes sense, but I need to be ready.

The caution may be partly down to valuation. BP isn’t necessarily a bargain. Its US$80 billion market capitalisation compares to nearly US$200 billion for Shell and more than US$470 billion for Exxon, but based on its enterprise value to cash flow, BP’s valuation is roughly in line with Shell, according to UBS Group research.

Factor in paying a premium, regulatory battles and distraction, and you can see why Shell chief executive officer Wael Sawan underscored the relative attractions of buying back his firm’s stock when asked about buying BP earlier the month.

Suppose BP slides further. Would Shell lose anything with its wait-and-see strategy? It’s important to bear in mind that any offers for BP would be governed by the UK’s takeover regime. This seeks to level the playing field among acquirers whatever order they go in. There are rules to prevent a stitch-up between a bidder and its target. Break fees are prohibited except in certain circumstances, and BP would have to permit any counter-bidder access to at least the same due diligence materials seen by suitor No 1.

The logic of going first would be to secure an agreement with BP’s board and get explicit backing from the UK government, in the hope that this deterred any potential foreign challenger. Maybe such an interloper would worry that BP’s nervous board might be reluctant to enter talks on an alternative transaction, or fear upsetting Downing Street.

But this is risky thinking. BP has Elliott breathing down its neck; there would still be huge pressure to explore every potential deal permutation. As for political protection, good luck with that. A Shell-BP tie-up would create a massive fossil-fuel company and involve job cuts. There could also be antitrust issues. In a choice between two independent UK oil majors or one employing fewer people, no change is surely the politicians’ preference.

Sure, going first would be a good idea if you were trying a nil-premium, stock-based deal and wanted to forestall a high-premium cash bid. But that’s a non-starter anyway. BP shareholders would want a big top-up, full stop. All the listed bidders are likely all to want to pay in shares, and their stock could be a strong cash-like currency so long as they can make a good case for a transaction. Now consider Shell’s position if a foreign bidder made the first approach. In that scenario, any subsequent involvement by the UK company casts it as a domestic rescuer – the buyer that would keep high-value BP roles in Britain. Political support is likely to be more forthcoming when the alternative is a company once called “British Petroleum” being subsumed into an overseas corporation.

Regardless of whether the UK’s national security strictures would formally apply here, governments can always influence deal situations simply because the authorities have the power to make life easy or difficult for any company operating in their country.

The best a foreign bidder could do to pre-empt or challenge Shell would be to make a really high offer accompanied by a Fortnum & Mason hamper of political goodies, such as commitments to preserve domestic jobs and retain a BP “head office” of sorts in the UK. But the more commitments the buyer makes, the less value in a deal.

So Shell’s stance makes sense. Deals are often won on knowing when or when not to bid, and Shell appears to have a neat second-mover advantage. BLOOMBERG