Biggest deal yet

A whopper of a deal comes along just a day after yesterday's FedEx-TNT merger. Shell's $70bn cash and stock bid for BG Group would make it not only the biggest deal in the oil and gas sector in a decade but would also rival last year's Comcast-Time Warner Cable mega deal in size. It is the biggest merger and acquisition (M&A) deal this year and the 14th biggest ever.

The merged company would become the biggest oil company by production - though ExxonMobil is larger by market cap - and cement Shell's dominance in liquefied natural gas (LNG).

Indeed, Shell has produced more gas than oil in recent years and the purchase of BG would allow them to focus on gas as well as deepwater production, according to Shell's chief executive Ben van Beurden. It gives Shell access to key reserves around the world and indeed raises their proven reserves by a sizeable 25%.

I wrote yesterday about whether this is the year of mega mergers. For the oil and gas sector, the halving of oil prices in the past year and the rise of shale gas has led to a slump in stock prices that is reminiscent of the late 1990s. That was when BP acquired Amoco and Arco, Chevron merged with Texaco, and Exxon purchased Mobil.

BG's shares have dropped by about 28% since last June alongside the decline in global oil prices. Its shares have jumped on the takeover news, up around 40% at one stage. That's still short of the 50% premium being paid by Shell to create the merged company, which would leave BG with a 19% stake.

BG's slump mirrors the plummeting share prices of other oil majors. The oil and gas component of the FTSE is down some 17% since last summer, which always raises the possibility of takeovers.

The Big Five - ExxonMobil, Royal Dutch Shell, BP, Chevron, Total - have also piled on record amounts of debt this year. Total debt issued by the largest US and European energy companies jumped to $31bn, taking advantage of low borrowing costs and helping to cover cash shortfalls. It's the other driver for M&A that I mentioned in my prior blog. It lays the ground for acquisitions as slumping energy prices hit smaller rivals harder than the oil majors.

As for the Shell-BG deal, it'll become the biggest company on the FTSE, and may well herald a wave of consolidation last seen during the last oil price crash. And it'll certainly add to the potential for 2015 to be the year of mega deals.