Acquisition Example

5th January 2012 - Ireland's Cove Energy launches a Formal Sale Process
 
Cove Energy Logo
 
This was the starting point for the eventual acquisition of UK listed Cove Energy. On the 5th January 2012, Mozambique-based oil and gas explorer Cove Energy decided to start a formal sale process in order to maximise shareholder returns. In this announcement, Cove stated the following:
 
"The Company is to conduct the formal sale process through its adviser, Standard Chartered Bank, in the following manner. Potential offerors for the entire issued and to be issued share capital of the Company should contact Standard Chartered Bank (contact details as below) without delay. Any interested party will be required to enter into a non-disclosure agreement with the Company on reasonable terms satisfactory to the Board and on the same terms, in all material respects, as the other interested parties, before being permitted to participate in the process. The formal sale process will involve a due diligence phase during which participants will be given access to a data room and management following which interested parties shall be invited to submit their proposals to the Company. The Board shall then discuss certain of these proposals with one or more relevant parties with a view to agreeing an offer with one party which it is able to recommend to shareholders."

The Initial Situation

Prior to the announcement, Cove was trading at an all-time high of around 130p/share having listed at less than 20p in 2005 and having traded around 8p for a circa 6 month spell in late 2008. Following the announcement of the formal sale process, Cove rose in anticipation of potential bids having a nice premium on top. This was primarily because Cove had a decent stake in a large gas resource with major US partner Anadarko Petroleum. This made the asset desirable especially since it was located in an upcoming global gas province. The shares rallied firmly towards 140p over the coming weeks although there had been an expectation of a formal sale well before the announcement. Therefore some of the large rise from 100p can be attributed to the expected sale beforehand.

After any takeover indication or bid, institutions must release what is known as a Form 8.3. This is a Public Opening Position Disclosure and is applicable to institutions who hold over 1% of a company's shares. The form includes how many shares the institution holds/has an interest in and is released via the company's news stream. Therefore, don't be surprised when it appears 5+ news statements have been released in a day, as they likely will just be Form 8.3's.

During a takeover, company news can obviously be released. The reaction to the news will be dependent on a number of factors. Assume the news is positive. If the news is released after a confirmed takeover offer, two reactions could occur. Either the share price will be stagnant as the market does not expect a counter-offer, or the share price will rise as the news may start to expect a counter-offer. If news is released before any offer has been made, the market will likely react as if the company is not in an offer period and the share price will rise more often than not. This was the case with Cove Energy. On 17th January 2012, Cove announced further success at the Mozambique gas field that helped prop up the share price.

Progressing through to the First Bid

On 30th January 2012, Cove completed an important step in it's formal sale progress. The company announced it had sold a non-core asset in order to improve it's situation with it's core asset by stripping a third party of it's royalty interest. This made the stake in the core asset more attractive to potential suitors as it gave Cove full rights over future potential revenues. The announcement included:

"The Agreement is an important strategic step for Cove, particularly in light of the Company's announcement on 5th January 2012 of the commencement of a formal corporate sale process, running alongside other options including possible sale of its interest in Area 1 EPCC. Following the termination of the Royalty, Cove will have an increased share in Area 1 EPCC through its resulting unencumbered 8.5% participating interest."
 
Rising takeover expectations and further drilling success in Mozambique continued to drive the share price higher to over 150p during this time. However, it was the offer from Shell on February 22nd that caught investors attentions and rewarded those who had invested. The main details were as follows:
 
 
On the day of the offer, as expected, because the offer was in cash the shares immediately rose to around 195p/share and closed at 194p. The premium was 73.3% when compared to the formal sale announcement, but far smaller at 28.5% when compared to a recent average at the time. Nonetheless, the offer valued Cove at a far higher level than it had traded at beforehand (£992.4m) and the small difference between the offer price and share price illustrated that the market thought the takeover was likely. The fact that the share price did not exceed the offer price also indicated that on that day, the market was not expecting an upgraded offer. As with all offers though, these were subject to certain procedures.
 
And it wasn't over yet!
 
After a day of stagnance on February 23rd, investors were surprised once again. PTTEP (Thai state owned National Oil Company) announced that it would step up and also bid for Cove, but it would beat Shell's offer by offering 220p. Once again, the offer was in cash and the offer valued Cove at a staggering £1.120 million. Consequently, Cove's share price rose to 220p on the open, but this time it flew past 220p and closed at 235p, a full ~7% above the latest offer. This indicated that the market believed another offer would not be out of the realms of possibility. Further to this, on February 28th, India's oil company ONGC released a statement indicating they were participating in the sale process but this did not mean they were expecting to make an offer.
 
However, on March 2nd, Cove shed nearly 10% after a shock set of rumours relating to the Mozambican government. Fears spread that the government were planning to impose a capital gains tax on the Cove Energy sale. Indeed, an individual from Merchant Securities said the following:
 
"this is very upsetting news with very serious ramifications for explorers across Africa. By the standards of oil & gas tax-grabs, taxes on capital gains are the worst possible type and they are also the rarest.This is worse than a retroactive modification of the tax parameters because it goes against the principles of tax agreements between oil companies and host governments and leaves companies with effectively no visibility"
 
The acquisition concludes
 
In April, after many fears had been allayed, Cove Energy clarified that tax situation noting that the sale would be subject to a 12.8% tax. Whilst this could impact the willingness of potential suitors to participate, there was a strong consensus that it would not impact upon the end result.
 
The game of Takeover Tennis continued through April and May with Shell upping their offer for Cove in April to 220p/share (the same as PTTEP had offered). This move once again ignited the share price with investors taking a punt on a further offer from PTTEP. Once again, investors were rewarded as, just like clockwork, PTTEP came back with an improved 240p/share offer that it later turned out Shell were not willing to exceed.  Nonetheless the shares rose as high as 275p during this period which was well over the 240p level that was being discussed. Perhaps investors were a little too eager at this point and once Shell's offer period lapsed the share price duly returned to the circa 240p level.

The acquisition was concluded in September 2012, and unsurprisingly there was a huge percentage of acceptances from Cove shareholders: "As at 10.00 a.m. on 23 August 2012, PTTEP AI had received valid acceptances from Cove Shareholders in respect of 497,850,445 Cove Shares representing approximately 97.82 per cent. of the existing issued share capital of Cove. Therefore, valid acceptances have been received in respect of more than 90 per cent. of the Cove Shares to which the Offer relates." Following this, Cove successfully delisted from the LSE on September 18th.
 
Clearly not all takeovers will be as long and drawn out as Cove's, but what Cove's did manage to do was derive clear shareholder value. Since the start of the process the shares were up nearly 100% and the offer was well over 150% higher than the average share price during 2012. This takeover does also highlight how it can be possible to make money from trading a takeover story. Those who bought on the initial rise to 195p in expectation of a higher bid were duly rewarded. However, the takeover also highlights how it is not a certainty to be investing in takeovers, especially when the share price is substantially higher than the last offer price. In fact, doing so is risky business. Those who invested at 275p would have been left sore following a 10% drop back down to the offer price. In those circumstances, the risk/reward was not particularly favourable especially since any Shell offer upgrade was likely to be by a few percent as opposed to many tens of percent.