The payouts are likely to be tax-free for the majority of small investors in BG, who will also see the number of shares they hold reduced by around 10 per cent.
BG plans to replace about pounds 1.5bn worth of shares - a 10th of its pounds 15bn market capitalisation - with new index-linked corporate bonds issued by its Transco pipeline arm in a move designed to give the group more flexibility and a lower cost of capital. At the same time, it intends to split Transco from its international exploration division and create two legally and financially separate businesses owned by a new holding company called BG Group. Shareholders will swap their existing holdings for shares in BG Group and index-linked bonds.
However, only shareholders who own more than about pounds 10,000 worth of shares will receive the new bonds. The rest - about 95 per cent of all BG shareholders - will get cash. The average shareholding in BG is 500 shares. These would be exchanged for 450 shares in the new holding company and pounds 186 of cash, based on last night's closing price of 372.25p
David Varney, chief executive of British Gas, denied the move was a precursor to a full-blown demerger of Transco from the exploration arm. He also played down suggestions that it was a defensive move to fend off a takeover, adding that BG had not received approaches from Royal Dutch Shell or any other potential bidders. "These are potentially `win-win' proposals. Shareholders and consumers both win when Transco is financed efficiently, when it is subject to regulatory clarity and transparency and when the group has the flexibility to pursue international growth," he added.
The latest financial restructuring follows a pounds 1.3bn return of capital to shareholders in 1997 through an issue of B shares. BG's shares have risen by more than pounds 2 and outperformed the market by 70 per cent since the company was demerged from Centrica, the gas trading and supply arm of British Gas, in February 1997. The capital restructuring will increase BG's total debt to pounds 6.8bn, assuming it issues pounds 1.5bn worth of corporate bonds. On the same basis, Transco's net debt would be $6.6bn, while its debt funding would rise to 55 per cent of its regulatory value, which is pounds 12bn.
BG has obtained support in principle for the restructuring from the Government and Callum McCarthy, the new head of Ofgem, the Office of Gas and Electricity Markets. Provided it gets final approvals and clearance from the Inland Revenue, it expects to complete the restructuring by year- end.
Mr Varney said ring-fencing the heavily-regulated Transco arm would enable BG to grow its international business more effectively. This year it plans to invest pounds 850m in its exploration arm, which has interests in the North Sea, Kazakhstan, Egypt and Trinidad.
Transco's cost of capital would fall by about a quarter of a percentage point or pounds 30m, according to BG's finance director, Philip Hampton. The pricing of the bond will depend on market conditions, but Mr Hampton said it would yield "significantly more" than BG shares, which are on an historic yield of 2.3 per cent.Reuse content