This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.

SHAREHOLDERS of Sona Petroleum Bhd will have another factor to consider when they vote on a proposed qualifying acquisition (QA) as the board, at the eleventh hour, has sweetened the deal with a capital repayment.

This makes the decision of whether to approve or scuttle the QA more complicated.

Barely three trading days before the special purpose acquisition company’s extraordinary general meeting, management proposed a capital repayment of up to RM80 million to shareholders on condition that the QA is approved. Given the short notice, some shareholders demanded more time to comb through the proposal. Subsequently, the EGM was adjourned.

The capital repayment gives Sona’s shareholders a handsome one-off return. Some quarters see this as the board’s last push to garner shareholders’ support for the QA amid concerns that most institutional investors are likely to vote against it simply because their investment purpose is to reap the profits between the cash per share in the trust account and share price paid.

Besides Platinum Autumn Sdn Bhd, which owns 20% of Sona, Credit Suisse Group AG and Pacific Alliance Group Ltd hold 12.82% and 10.58% of the SPAC respectively. Platinum Autumn is the investment vehicle of Sona’s managing director Datuk Seri Hadian Hashim and other directors.

“The capital repayment provides a high return to Sona’s shareholders. It is a big carrot that management is dangling in front of the shareholders’ noses. The message is clear: Vote for the QA and you’ll get the carrot,” says an observer.

Sona will have to hold another EGM within the next 30 days, from March 30, to decide on the QA.

Under the capital repayment, all shareholders get 7.09 sen per share if the QA is approved and no shareholder votes against it. This translates into a 15.6% yield based on Sona’s closing price of 45.5 sen last Thursday.

Assuming the payment for the repurchase of the dissenting shareholders’ shares amounts to RM30 million, the capital repayment would be reduced to RM50 million or 4.69 sen per share. This translates into a 10.3% yield.

If the payment for the share repurchase totals RM60 million, the capital repayment would be reduced to RM20 million. Consequently, the capital repayment per share would amount to 1.99 sen or a 4.37% yield.

The SPAC’s proposed QA made the headlines recently because it had to halve its purchase price to US$25 million. This was after Securities Commission Malaysia alerted it to an independent valuer’s opinion that the initial price was above market value.

Sona is seeking to buy 100% of the Stag oilfield off the coast of Western Australia from Quadrant Energy Holdings Pty Ltd and Santos Ltd for US$25 million. The oilfield currently produces about 4,600 barrels of oil equivalent per day.

Some opine that the capital repayment might be the result of Sona’s meetings with its institutional investors, which hold sizeable amounts of its shares. Observers feel that the institutional investors will vote against the QA as they stand to reap good returns without taking any risks.

Sona proposes to distribute RM80 million from the remaining funds in its trust account, provided the QA is passed and the amount to be paid to dissenting shareholders is not more than RM60 million.

“It is good that the EGM was adjourned. It gives shareholders a fair chance to understand and make a decision on whether to vote for or against the QA. Many of my clients actually changed their minds when the capital repayment was announced,” a stockbroker tells The Edge.

Before the capital repayment was announced, the shareholders were generally against the QA, says the stockbroker, adding that this is because there are a lot of yield investors among them that are looking to exit with a decent buck.

As at Dec 31, 2015, Sona had RM527.55 million in a trust account that was set up for the QA. But if the QA is derailed, the money will have to be returned to the shareholders. Excluding Platinum Autumn’s interest, there are 1.129 billion shares outstanding.

This translates into 46.7 sen per share to be returned to Sona’s shareholders in the event that the QA is not approved and the company is liquidated. If a shareholder had bought Sona’s shares at its lowest level of 39 sen, it stands to make a 19.7% yield.

Nevertheless, the liquidation process may take between six months and a year, if not longer. Only then will the shareholders be distributed the money kept in the trust account.

Sentiment on oil and gas stocks remains weak as Brent crude oil is still directionless, hovering in a tight band of US$35 and US$40 per barrel since Feb 26. Nobody can say for sure if Sona will be profitable in the near future, considering the producing fields are mature.

The circular to shareholders regarding the QA states that in the nine months ended Sept 30, 2015, sales of oil from the Stag oilfield amounted to US$54.2 million while its operating expenditure was A$70.3 million or about US$56 million.

Nonetheless, Sona needs capital expenditure to develop new wells to enhance production. This raises the question of whether the company needs to make a cash call to fund future capex, which may amount to more than the capital repayment.

The general opinion of the QA, before the capital repayment was announced, was that it was bound to fail as short-term yield investors would be voting against it to cash out. However, the capital repayment may have changed the perception.

Nevertheless, Sona’s shareholders will have to think hard before deciding on whether to approve or reject the QA. With the short-term yield investors lurking around, what are the chances of approval? 

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