My BG stocks turns in to Shell (RDSB) – Making Money from Merger Abitrage

Royal Dutch Shell’s takeover of BG became official today. As an investor, it has been interesting to not only make money from this takeover but to also see how the takeover unfolded from the initial announcement in April last year. There were many sceptics who touted that the deal will not go through and this created a spread between Shell’s offer price and BG share price. BG has been trading at a discount for the majority of the time since last October and this provided a great opportunity for many investors to make money via Merger Arbitrage. I too decided that the upside in buying into BG at a discount far outweighed the downside and in December last year, I bought some shares in BG as seen on a post I had earlier written about buying Shell shares at a discount.

Shells Mix and Match offer for BG shareholders

As seen by a post I did on the Mix and Match offered by Shell, Shell offered a number of options to BG shareholders as to whether they would like to be compensated for their BG stock via all cash, RDSB shares, RDSA shares or a combination of the above.

Shell released the results of the mix and max allocations today and the results of it are depended on the election you made.

  1. If no election is made – You get the default offer of 383 pence in cash and 0.4454 of a New Shell Share
  2. If Cash election is made – This will be satisfied in full.  Reading the information released from Shell, this should be £10.36 for each BG share you hold. The cash should hit your account by 29 February.
  3.  If Shell B election made – This has been scaled back. Thus on 26.56% of your BG holding, you will get the default 0.4544 shares in RDSB and £3.83 in cash. On the remaining 73.44% of your BG holding, you will get 0.70628867 shares in RDSB and no cash.

The Shell B election scale back has caused confusion amongst many so I will aim to simplify it. If you have 100 BG shares and are elected for full Shell B shares, you will get the following approx £101.72 in cash and 63.68 RDSB shares.

  • 100 shares * 25.56% for default = 26.56 shares subject to the default action
    • 26.56 * £3.83 = £101.72 in cash
    • 26.56 * 0.4454 = 11.82 RDSB shares
  • 100 Shares * 73.44% = 73.44 shares will get full RDSB shares
    • 73.44 * 0.70628867 = 51.86 RDSB shares.

So In essence, if you had picked the option where you get only Shell B shares, you would get the following under the scale back: 0.637 RDSB shares per BG, plus £1.017248 cash per BG share. The RDSB shares will be rounded down, and any additional entitlement would be converted to cash.

The date for receiving cash from the Shell-BG deal is 29 February 2016.

How Many Shares I have received for my BG stock

I made an election to get all B (RDSB) shares. Unfortunately as seen by the above, this option was scaled back – perhaps this was due to more people wanting RDSB shares than the cash on offer.

As I had 67 shares in BG, I received the following in my account today:

  • 42 new shares in RDSB
  • £68.15 in cash. (Update: I received this cash portion of the deal on Monday 29 February 2016).

Although I would have preferred to get my full allocation in RDSB shares and nothing in cash, I am still thrilled with the end result of buying into shell. I have made a gain of over 9% on my BG shares and this gain will only rise as the oil price rises.

What I am even more excited about is the extra dividend income these 42 new RDSB shares will bring to my portfolio. These 42 shares should add just over £52 in cold hard cash to my portfolio every year. Subtracting the cash amount of £68.15 from my initial investment, I have managed to bag myself a whopping yield of 9%! Let’s just hope those dividends don’t get cut!

Tax Treatment of Gains in a Takeover

I am by no means planning on selling my Shell (RDSB) stock. As I mentioned above, I think Shell is a wonderful business and I intend to receive dividends from this oil giant for a very long time. Thus from my point of view, there will be no Capital Gains Tax for me to pay at this stage.

Naturally, not everyone shares my views on holding Shell with many telling me that they are keen to sell. For them, they are happy with the gains their BG stock have made and are happy to take profits at this stage. Many ex-BG shareholders who are in this position and are keen to sell will pay Capital Gains tax on their profits – provided it was not held in a tax shelter such as a Pension or ISA.

Ordinarily, working the amount of Capital Gains Tax is easy. It is simply the amount you receive (Consideration) less the Acquisition Price and any dealing charges. This will give you the gain which you can then apply your relevant CBT banding on.

However, when you receive shares as part of the takeover, the capital gain calculation will depend on the sale price of the new shares you have received.

So if you bought 100 BG shares at £9.00 each, your Acquisition Cost would be £900. If you received a default offer of £3.83 and 0.4454 RDSB stock per BG share, you would have £383 in cash and 44.54 RDSB stock (we round up to £45 for simplicity).

If you were to sell all your holdings in RDSB at todays price of £15.30, you would receive £688.15. Thus your Gain would be :

 Total Consideration (£688.5 + 383 ) – Acquisition Cost (£900) = £171.5 Gain.

You would then multiply the £171.5 to your relevant Capital Gains Tax banding to find the amount you need to pay. In the above calculation, you can also subtract your dealing charges when you bought the stock. You should also remember that you have a Capital Gains allowance of £11,100 meaning that if you have gains under this in any one tax year, you do not have to pay any tax!

Tax consequences of cash received in a takeover

Even if you do not sell any shares, there will still be tax consequences if you have received cash in a takeover. The way your tax is calculated depends on whether the amount of cash you receive is small. In essence, cash is considered small if it is below 5% of the overall value of your holdings or less than £3000.

If your cash holdings are small, you simply reduce your initial acquisition cost by the cash amount. You would treat the cash received almost like a return of capital. For example, I bought my BG shares for £642 and subsequently received £60 in cash from the Shell takeover. As £60 is below £3000 it is small. Thus all I need to do is reduce my acquisition cost by £60 when I eventually sell my Shell shares from this takeover. So my new Acquisition cost has become £642 – £60 = £582. My gain is ‘rolled over.

If on the other your cash amount is not small, you cannot roll over the gain. For example, if you bought £70000 worth of BG shares and received £6500 in cash and 5680 shares in Shell, you will need to work out the cost of that cash element for you to find out the cash you have paid. To work out the cost, use the following formula:

Cash received – Base Cost * (Cash / Cash + MV of shares) = Gain on the cash element of the transaction.

So for the example, I have given, it would be:



70000 * (6500 / 6500 + 86336) = 4901



Thus you would have a gain on your cash amount of £1599. In case you are wondering where the 863336 came from, it is worked out as follows 5680 shares * 15.20 which is the estimated price per share of the RDSB shares on the date of the transaction.

The tax consequences of a takeover can be complicated for many and that is why it is not wide for the average person to take advantage of merger arbitrage. But if you are playing with small amounts, there should be no tax to pay as UK residents have a tax free capital allowance amount of £11,100 a year. Furthermore, if you held these shares in an ISA or a Pension (SIPP) there will be no tax to pay as well. AS always, if you are unsure what to do, please seek the advice of a tax professional. The last thing you would want is for HMRC to be after you!


7 thoughts on “My BG stocks turns in to Shell (RDSB) – Making Money from Merger Abitrage”

  1. Thanks for the excellent analysis.I now at last have an idea of the b shares I’ve been allocated. It is now 2 days since the merger went through and my shareholder account with First Direct has yet to convert my BG shares into Shell shares (election for max allocation of B shares requested) and still has the last BG valuation showing on my account while having wiped off the BG shares from my portfolio. My other account made the change on 15/2/16. You can draw your own conclusions as to using First Direct shareholding service for your portfolio. I shall be closing my account.

  2. I cannot resist sharing my experience with Selftrade: on my portfolio, they are showing both the BG shares at their market value before the merger AND the newly allocated RDSB shares, giving a totally misleading impression of the value of my portfolio. This is not the only issue I have with Selftrade, and I wrote to the Chief Executive to spell them out. No answer. In my view, avoid!

    • That’s inexcusable from Selftrade. I have a friend who is with Barclays stockbrokers and he only received his RDSB shares on Friday. For such a big deal, it is amazing how many brokers have been so lax on the issue. Let’s just hope the cash part of the deal reaches us in time!

  3. Thank you for an excellent and simple explanation of how to work out capital gain. So much better than HMRCs attempt.

  4. Thank you for an excellent and simple explanation of how to work out capital gain. So much better than HMRCs attempt.

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