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Shell’s last chance

Business Spectator

Stephen Bartholomeusz
BG Group has gatecrashed Arrow Energy’s rather cosy bid for fellow Queensland coal-seam gas play Pure Energy, threatening what had appeared a fait accompli and potentially creating a confrontation with Arrow’s ‘big oil’ ally, Shell. 

BG has left its run late. Arrow unveiled its cash and scrip bid for Pure in late December and dispatched its bidder’s statement last week. It has claimed the support of a fraction under 50 per cent of Pure’s register, including a 19.9 per cent shareholding of its own, a 14.9 per cent stake held by Shell and 11 per cent by Pure’s directors.
BG, which has bought a 10 per cent shareholding in Pure, has, however, heavily over-bid for Arrow – its $796 million, $6.40 a share bid compares with the $5.50 a share value of Arrow’s offer before its price spiked. Its 10 per cent stake, and a declaration that it doesn’t intend to accept the Arrow offer, means it can frustrate Arrow’s ability to satisfy its 90 per cent minimum acceptance conditions. BG’s offer has minimum acceptance conditions of just 50.1 per cent. 

Despite its late entry to the fray BG self-evidently believes its cash will prove more persuasive than Arrow’s mixture of cash and scrip.

Its strategy appears quite straightforward. The Arrow offer is dependent on the value of the scrip component. BG’s stake means that it can prevent the current offer from succeeding. 

If Arrow were to reduce its minimum acceptance condition its inability to fully exploit ownership of Pure would undermine the value of its scrip relative to what it might otherwise have been. Issuing more scrip to compete with the value of the BG offer would undermine it further. 

BG would know that Arrow and Shell are unlikely to accept its offer unless it is clear control has passed to BG. To succeed it probably needs to fracture the shareholdings of directors and their associates, which total about 15 per cent. 

In accumulating its shareholding, it is suggested BG approached some of those shareholders but was rejected because the Pure directors and founders want to maintain an exposure, through Arrow’s shares, to Pure’s asset base. It will need to convince at least some of them that cash is preferable to devalued paper. 

That places the Pure directors in an invidious position, particularly as a change in recommendation – and without a big increase in the value of the Arrow offer it would be very difficult, if not impossible, to avoid endorsing the BG bid – would trigger a break fee of at least $2 million which, for a company with only $13 million of cash but is chewing up more than $6 million a quarter, is not immaterial. 

The worst outcome for Pure would be where neither Arrow nor BG can succeed – a prolonged stand-off that left it in limbo and which gave BG the time to lift its holding to 14.9 per cent.

It is conceivable that Shell could get more heavily involved. Pure’s acreage is appealing to Arrow and Shell because it would beef up their reserves base in the event that Shell decides to proceed with the building of an export LNG plant fed by coal-seam gas at Gladstone. Last year Shell paid $776 million to acquire a 30 per cent interest in Arrow’s coal seam gas acreage.
Shell hasn’t been as aggressive in acquiring a Queensland coal-seam gas exposure as BG, Petronas and ConocoPhillips but it wouldn’t want to be boxed into a position as a minor player either.

Pure is, however, probably worth more to BG than to Arrow or Shell. Around about the time Arrow unveiled its bid for Pure, BG was wrapping up its $5 billion acquisition of Queensland Gas (QGC). Pure’s best acreage is adjacent to QGC’s, so a successful bid for Pure would provide significant development and production synergies. 

For BG, there would also be some option value in a Pure acquisition. QGC probably has the reserves to support a two-train LNG plant at Gladstone but adding acreage and reserves would give BG both security and the option of expanding the plant in future. All the prospective Queensland LNG rivals are focused on the longterm security of their resource bases. 
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