Royal Dutch Shell, Europe's largest oil company by market value, toyed with the idea of a BP takeover in the midst of last summer's oil spill but was deterred by BP's mounting legal liabilities, The Daily Mail reports. Yet Shell is still interested in a merger with its embattled rival, the article adds. BP shares hit a six-month high Tuesday, fueled by the news along with a suggestion from the lawyer administering BP's $20 billion oil spill compensation fund that damages payments might only amount to $10 billion.

This is not the first time speculation about a BP merger has bubbled up; over the summer, near the end of the Deepwater Horizon mess, some wondered whether U.S. oil giants Exxon Mobil and Chevron were preparing a hostile bid for BP. The Daily Mail notes that Shell does not want to be a "first mover" and only plans to act if one of its rivals pursues an offer for BP.

How likely is a merger?

  • Shell May Very Well Be Interested, says Oslo-based analyst Gudmund Halle Isfeldt, as quoted by Bloomberg: "BP has done a lot to mitigate all the bad things that happened last year. They're on more solid footing now."
  • Bid More Difficult Now Than During Oil Spill, notes Tom Bergin at Reuters. During last summer's crisis, he explains, analysts expected Exxon and Shell--"the only companies considered large enough to mount a bid"--to crunch the numbers on a possible BP takeover. But now that "BP's shares have rebounded 65 percent from their June low at 296 pence, to give BP a market value of around $140 billion, a bid would be much harder to mount, especially for Shell which is worth over $210 billion."
  • Shell Has The Money, But There Are Serious Concerns, states Douglas McIntyre at 24/7 Wall St. An offer will draw competing offers from the likes of Exxon or Chevron, and the resulting bidding war will drive BP's share price up to "irrationally high levels." What's more, he adds, there is no end in sight for BP's legal troubles. On the other hand, the rising price of oil is likely good news for BP's earnings. McIntyre continues:

A buyout of BP would be based on the analysis of what the acquirer could do to save money in a consolidation. That is almost always an excuse for offers made by one firm for another when both are in the same sector. Shell or some other multinational oil company may cut costs at the executive and administration levels. It is much harder to see how much can be saved by combining exploration and refining operations around the world.

BP, as its board has found out as its sells assets, is probably worth more in pieces. Several sets of offers all meant to acquire BP are just as likely to cause a break-up of a firm--which may still have more trouble than it can handle.

  • Shell Won't Merge With BP, declares Panmure Gordon analyst Peter Hitchens, as quoted in The Wall Street Journal: "A merger between Shell and BP would end up with all sorts of monopoly problems ... in places like Germany they would be getting towards 50% market share."