Regulatory worries, energy prices take shine off Shell-BG deal

* Spread between BG shares, Shell (LSE: RDSB.L - news) offer rises

* Oil price, regulatory approvals, risk-aversion to blame

* Deal still expected to complete in early 2016

* Graphic: http://link.reuters.com/qyf54w

By Ron Bousso

LONDON, Sept 8 (Reuters) - A look at valuations illustrates how regulatory concerns and stubbornly low energy prices have stoked investor anxiety over Royal Dutch Shell (Xetra: R6C1.DE - news) 's planned takeover of British rival BG Group (LSE: BG.L - news) .

Hailed as an audacious and industry-changing merger when it was unveiled in April, the headline value of the deal has slipped from 47 billion pounds ($72 billion) to around 38 billion because of the lower price of Shell shares, which closely track oil prices.

Concerns that the Australian and Chinese regulators could set high hurdles and, more broadly, that the persistently low oil prices could yet lead Shell to rethink the deal are dampening sentiment. That has left BG shares trading at a discount to the Shell cash and share offer.

The wider malaise infecting the global equity market in recent weeks has also contributed to heightened caution among investors.

That gap between the price of BG shares and the Shell cash and shares offer has widened over the past two weeks to an average of 16 percent from around 12 percent following the announcement of the deal on April 8, showing that sense of investor unease.

"The spread widening is driven by the risk-off environment and unwinding (of positions)," said Lionel Melka, Chief Investment Officer at Paris-based asset management company Bernheim, Dreyfus & Co.

More tangibly, the Australian Competition and Consumer Commission said last week it needed more time to review the takeover.

It (Other OTC: ITGL - news) postponed a decision until September 17 as it weighs whether the merger could impact Australian gas prices and hinder competition, particularly in Queensland where both companies are developing large projects.

"In our view, the key risk is the Australian approval," added Melka.

Investors were reminded of the risks associated with mega mergers in July after reports that U.S (Other OTC: UBGXF - news) . antitrust enforcers voiced concerns that oilfield services provider Halliburton Co's $35 billion acquisition of smaller rival Baker Hughes Inc may lead to higher prices and less innovation.

However, the Shell-BG merger has received key approvals from U.S., Brazilian and European regulators but still requires the green light from two Australian bodies as well as China.

KEEPING THE FAITH

The deal was seen as a bold bet by Shell on the oil price recovering to $80-$90 per barrel within three years, but it currently remains under $50.

Despite the jitters, analysts still expect the deal to go through in its original form.

They largely agree with Shell Chief Executive Ben van Beurden's assertion that the merger would make Shell "a simpler and more profitable company, making Shell more resilient in a world where oil prices could remain low for some time."

BG is seen as much more vulnerable to a prolonged downturn since most of its projects break even at price much higher than those for Shell.

Shell's low gearing allows it to finance the acquisition while maintaining dividends while BG's increased production will boost cash flow, UBS (NYSEArca: FBGX - news) analysts said in a note.

The industrial logic of the deal is still compelling for many investors.

"Concerns about the deal not going through due to low oil prices aren't, in our view, justified... Overall we find the risk-reward currently pretty attractive," said Melka, who has invested in BG shares.

BG's rapid oil and gas output growth in the coming years is set to make the combined entity the top producer among international oil companies, leapfrogging Exxon Mobil (Swiss: XOM.SW - news) at around 4 million barrels of oil equivalent per day by 2020, according to analysts at U.S. investment bank Simmons and Company.

The acquisition will make the combined entity the world's top liquified natural gas (LNG) producer and the largest investor in Brazil's deepwater oil production.

A Shell spokesman declined to comment, stressing that the deal was on course for completion in early 2016.

BG BUYING OPPORTUNITY?

Any delays to the deal could result in BG shareholders missing out on one or possibly two Shell dividend payouts,

That would account for up to 3.8 percent of the spread between the two shares, according to Anish Kapadia, Managing Director, International Upstream Research at U.S investment bank Tudor (Other OTC: TDRLF - news) , Pickering Holt and Co.

The gap (NYSE: GPS - news) between the offer valuation and BG share price would appear to offer pickings for arbitrage deals -- the buying and selling of related assets to profit from price differentials.

However, the sheer scale of the deal militates against this -- buying 1 percent of BG shares requires more than 300 million pounds.

"The deal is so big that there are not enough arbitragers that can keep the spread in a tight ranges," said Niels Lammerts van Bueren, senior portfolio manager at Amsterdam-based arbitrage fund TRZ Funds.

"I don't think anyone wants to go into the arbitrage too big so the spread could widen further," he added.

($1 = 0.6503 pounds) (Reporting by Ron Bousso; Editing by Keith Weir)