September 15, 2008

BG Group Acquisition: the Hunter Becomes the Hunted

UK gas explorer BG Group's hostile takeover of Australasian energy supplier Origin Energy has been all but sunk by a deal between Origin and US oil giant ConocoPhillips, to form a joint venture company that will own and operate Origin's coal seam gas reserves.

Australasian energy supplier and gas explorer Origin Energy has agreed a A$9.6 billion (GBP4.5 billion) deal with US oil giant ConocoPhillips to form a joint venture out of Origin's coal seam gas (CSG) reserves. This appears to signal the end of BG Group's plans to acquire Origin, as the sole reason behind its targeting of Origin was to acquire the company's CSG reserves.

The impending failure of the takeover places more emphasis on the tactics that BG Group employed to try and get its hands on Origin's CSG reserves. Despite the initial positive reaction from Origin, the all-out acquisition offer seemed a questionable move from the start by BG Group. Origin Energy's gas exploration arm only forms a small, but nonetheless important, part of the overall company, and it is hard to reason why BG Group would need the entire company.

The success of the deal by ConocoPhillips points to how BG Group should have initially tried to structure a deal. BG Group was only concerned with acquiring the CSG reserves and Origin was obviously very reluctant to part with them. Although Origin was loath to lose its valuable gas assets outright, it was open to divesting its share while still having control over its future. This should have been BG Group's first line of attack, as an investment in Origin's reserves would have given it access to the gas without the large financial outlay a full takeover would have brought.

The irony of the situation is that BG Group has now been the recipient of some unwanted speculation over its own future. Unsubstantiated reports have suggested another US oil giant, ExxonMobil, is lining up a bid for BG Group, in an effort to increase its presence in the liquefied natural gas (LNG) sector. A possible bid from ExxonMobil may also be aided by BG Group's weak share price after its failed Origin takeover and the negative general market conditions at present.

BG Group's failed takeover illustrates that lessons can be learnt, and the success by ConocoPhillips shows how a different approach could have succeeded.