Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on February 15 - 21, 2016.

The Securities Commission Malaysia (SC) has given the go-ahead to Sona Petroleum Bhd to propose its qualifying acquisition (QA) to its shareholders, despite an independent valuation company stating that the US$50 million (RM208 million) purchase price is “not fair” and on the high side.

Sona Petroleum announced late last Friday that it had received approval from the SC for its proposed acquisition of a 100% stake in Stag oilfield, off the shores of Western Australia, from Santos Ltd and Quadrant Energy Pty Ltd for US$50 million.

However, in the approval, the SC notes that the purchase price is not fair as it is above the fair market value of the oilfield, citing a valuation report from independent technical and asset valuation expert Gaffney, Cline & Associates (Consultants) Pte Ltd.

“The SC recognised that the purchase price taken in isolation is one of several factors that shareholders will consider in approving the proposed acquisition, and in deciding whether to exit their investment in the company and receive the amount in the trust account that is due to them,” Sona says in a statement.

“Other factors may affect such a decision and shareholders may still take the view that a qualifying acquisition is reasonable although the price is ‘not fair’. The SC is of the view that shareholders should be given the opportunity to decide on the proposal,” Sona adds.

The SC says one of the reasons it is allowing Sona to propose the acquisition to its shareholders is that the difference between the transaction price and the fair value will not necessarily be detrimental to the interest of investors.

“The SC may allow shareholders to decide on whether to proceed with the transaction, provided all the required information is communicated fully and appropriately,” the statement reads.

Sona was the third special purpose acquisition company (SPAC) to be listed on Bursa Malaysia, after Hibiscus Petroleum Bhd and CLIQ Energy Bhd. Sona was listed on July 30, 2013, and it raised RM550 million from investors for the purpose of acquiring oil and gas assets within three years.

The company first announced its acquisition target in June 2014, when it had its sights set on Salamander Energy PLC’s assets in the Gulf of Thailand. However, the deal was aborted following Salamander’s merger with Ophir Energy PLC in March 2015.

The approval from the SC is the first “checkpoint” that Sona has managed to pass. Now, the board of directors will have to justify the acquisition to its shareholders, and get at least 75% of them to approve it. Sona has until July 29 to get the QA approved by its shareholders.

It is noteworthy that Sona’s directors and top management who hold shares in the SPAC are not allowed to take part in the voting process.

Given the valuation report, Sona’s directors may have a hard time convincing its shareholders. Furthermore, short-term investors may try to block the acquisition to get the money from the trust account.

Sona has RM515 million of funds in its trust account. If the company can’t get 75% of its voting shareholders to say yes to the proposed acquisition, it will have to return 90% of the funds.

Based on Sona’s listing prospectus, the SPAC’s financial liability component of public issue shares amount to 45 sen per share. This means that Sona will have to return 45 sen per share in cash to its shareholders if it does not manage to undertake a QA by July 29.

If the QA is blocked by Sona’s shareholders, it would not cause a collapse in the company’s share price as the early birds who bought the shares at a much lower price than 45 sen per share would see a good return. Sona’s share price as at last Friday was 45 sen per share.

According to the SC’s equity guideline for SPACs, a SPAC will need to utilise at least 80% of the funds in its trust account for the purpose of a QA. The purchase price of US$50 million equates to only 40% of the funds in the trust.

CIMB Investment Bank Bhd, Sona’s financial adviser, is seeking relief for the requirement to spend 80% of the funds for the QA. This is because additional expenses to undertake infill development to enhance the production of the oilfield is considered part of the QA.

One condition imposed by the SC for the approval is for Sona to appoint an additional independent non-executive director, who has the appropriate qualification and experience, before the issuance of the circular on the QA to the shareholders.

CIMB IB and Sona will also have to fully comply with the SC’s equity guidelines and the main market listing requirements of Bursa pertaining to the implementation of the QA.

The SC explains that the proposed acquisition would only be commercially viable if the proved plus probable (2P) reserves of the Stag oilfield is produced. That is why the regulator is allowing the infill development to enhance the production of the 2P reserves to be regarded as part of the QA.

It also states that the infill development has to enhance and improve the production of the 2P reserves and is not for contingent resources or exploration and development, which have elements of uncertainty.

The approval given by the SC to Sona for its QA may put pressure on CLIQ Energy as it has yet to obtain approval for its own QA. CLIQ Energy has proposed to acquire a 51% stake in two oilfields in Kazakhstan for US$110 million.

According to a source familiar with the matter, CLIQ Energy did not provide sufficient information on the value of the oilfields’ reserves when submitting its application.

“Sona gave a clear value of the reserves to the SC, while CLIQ Energy did not. For the SC, it is about whether the shareholders of the SPACs would receive sufficient information on the proposed QA,” says the source.

Although Sona has managed to clear the first hurdle, it is now up to the shareholders to decide whether they want to risk investing in an oilfield at a time when crude oil prices are low, or take the easy way out by blocking the QA and getting their money back.

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