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Cove Sparks Top Bids for Gas Explorer in Africa: Real M&A

By Alex Barinka – Jul 4, 2012 10:00 PM GMT+0100

Traders are more convinced than ever that a bidding war for Cove Energy Plc (COV) will lead to the richest takeover premium on record for an oil and natural-gas explorer.

The owner of a stake in gas fields off Mozambique lured a sweetened offer of 1.2 billion pounds ($1.9 billion) from PTT Exploration & Production Pcl in May that topped prior bids from Royal Dutch Shell Plc. (RDSA) Shares of Cove rose to a record 270 pence yesterday, almost 13 percent above PTTEP’s proposal, indicating traders who profit from acquisitions anticipate the competition will escalate. It now trades higher above the offer price than any other pending acquisition in western Europe of at least $500 million, according to data compiled by Bloomberg.

A deal at the current stock level would be 90 percent above Cove’s 20-day average before Shell’s first offer in February, making it the steepest premium for a takeover of an oil and gas explorer greater than $1 billion, the data show. While Cove has yet to generate revenue, the London-based company owns an 8.5 percent stake in Mozambique’s Rovuma Area 1, where recoverable natural gas amounting to more than six times the U.K.’s existing reserves has been discovered. Merrion Capital Group estimates that increasing gas finds will entice Shell and Thailand’s state-controlled PTTEP (PTTEP) to push bids to 290 pence a share.

“It is a first-of-its-kind deal, in a country that is the first of its kind, in a situation with two people with very deep pockets,” Laurie Pinto, chief executive officer of event-driven research firm North Square Blue Oak Ltd. in London, said in a telephone interview. “People are interpreting that Shell will return, and that is why it is trading so far above. At this level though, they are interpreting that as a double move: if Shell comes back, PTT comes back again.”

Sale Process

Billy Clegg, a spokesman for Cove, declined to comment on whether the company expects higher offers.

Claire Scotter, a London-based spokeswoman for The Hague- based Shell, declined to comment. Tevin Vongvanich, chief executive officer of Bangkok-based PTTEP, didn’t answer a call to his mobile phone or immediately respond to a text message left after regular office hours. PTT Pcl (PTT), the state-owned energy company, is the parent company of PTTEP.

Since Cove formally put itself up for sale on January 5 when the shares were trading at 112.5 pence, the stock has climbed 140 percent as Shell’s 195-pence-a-share bid in February was topped by PTTEP two days later. Each company has since submitted at least one additional counterbid and both have secured approval from the Mozambique government.

PTTEP’s latest offer of 240 pence a share — a 69 percent premium to Cove’s 20-day trading average before any bid was disclosed — tops Shell’s current bid of 220 pence.

Bidding War

PTTEP, which had only secured 0.25 percent of the stock outstanding as of June 22, said its tender offer will end July 6. After only 3.46 percent of investors had tendered their shares to Shell as of June 27, Shell’s latest extension expires July 11.

If Shell is “really of the view that this was a bidding war and it wasn’t going to work for them and they had a plan B, then they would have just straight walked away,” Stuart Joyner, head of oil and gas analysis at Investec Securities Ltd. in London, said in a phone interview. “There is still a quite strong possibility that Shell will come back. PTT has already said they would likely respond if that happens.”

After Cove shares closed at a record 270 pence yesterday, the 12.5 percent gap over PTTEP’s proposed deal price is the biggest of any pending deal in western Europe of at least $500 million, data compiled by Bloomberg show, indicating traders anticipate Cove will get the steepest price increase.

“They are expecting another bid, plain and simple,” Jason Gammel, a London-based analyst at Macquarie Group Ltd.

Richest Premium

Even at Cove’s closing price yesterday, a deal would be the richest premium on record for any takeover of an oil and natural gas explorer and producer in the world valued at more than $1 billion, data compiled by Bloomberg show. The 90 percent premium to Cove’s 20-day trading average before Shell’s original bid would be more than three times the industry average of 26 percent, the data show.

Iain Reid, a London-based analyst at Jefferies, says investors shouldn’t wager on a sweetened bid from Shell. The company’s desire to acquire additional resources in Mozambique may prevent it from boosting the Cove offer because that could increase prices for other assets in the area, he said.

Also, the potential returns for investors may be limited, according to a June 25 report from Jefferies analysts including Laura Loppacher and Reid. The report said Shell may only top PTTEP’s bid by 15 percent — in line with previous counterbids – – to 276 pence a share. That would only be 2.2 percent more than yesterday’s closing price, while a decline in Cove’s stock price to the level of PTTEP’s offer would be about 11 percent.

New Discoveries

At the Rovuma Area 1 exploration block off the coast of Mozambique, a group led by Anadarko Petroleum Corp. (APC) has found increasing amounts of natural gas since the bidding for Cove began. Last month Cove announced further gas finds, increasing the total to 30 trillion to 60 trillion cubic feet of recoverable gas resources, up from as much as 30 trillion cubic feet previously.

The market believes “that the price needs to reflect those new discoveries, and that is why the stock has gone up the way it has,” said Macquarie’s Gammel. “This is one of the very few circumstances where a company of a very small size has bludgeoned themselves into an emerging world-class asset.”

Shell, Europe’s largest oil company, may push the bidding to at least 290 pence a share, Muna Muleya, an analyst at Merrion Capital in Dublin, said in a phone interview. That would be a 104 percent premium to Cove’s 20-day average before the bidding started.

Supplying Asia

Investec’s Joyner says a takeover price could reach 330 pence a share — a 132 percent premium and 22 percent more than yesterday’s close — because of Cove’s stake in one of the biggest oil and gas discoveries in the last decade.

The discoveries open the way for Mozambique to become an exporter of liquefied natural gas, shipping fuel to Asian economies including India and China. For state-controlled PTTEP, buying Cove would give Thailand a secure source of gas. For Shell, the world’s largest manager of LNG ships and member of joint ventures supplying 30 percent of global LNG volumes last year, it offers a foothold in East Africa.

“By any measure, it is a genuine, world-class gas asset in a strategic location on the Pacific Rim that’s easily accessible for export to hungry Asian markets,” Werner Riding, an analyst for Peel Hunt LLP in London, said in a phone interview. “The market is clearly pricing in another counter.”

To contact the reporter on this story: Alex Barinka in New York at [email protected].

To contact the editor responsible for this story: Sarah Rabil at [email protected].


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