jp morgan - the advisors who advise a firesale

Last night I just kept thinking about JP Morgan and ESG. The same thoughts kept going through my head...

- JP Morgan have been appointed financial advisors to ESG.

- JP Morgan came out with a report only 13 days before the announced 'deal' with Santos. (So, during the period when the scheme was been agreed and drawn up).

- And yet in their report, JP Morgan, ESG's advisor, suggested values far higher than the price that was apparently agreed between ESG and Santos, in the event of ESG signing a large GSA.

On 5th July, JP Morgan publish a report on ESG, with this comment about the value to ESG of a 4mtpa sales agreement:

"the value of a 4mtpa supply contract is estimated at A$1.59/share. We think that suggests better value and fewer headaches for a Queensland LNG player from launching a takeover."

Note that this is not the total value of ESG, but rather the value of just this GSA, on top of the existing market certainty.

13 days after this report was published, the Scheme of Arrangement with Santos was announced. This agreement must've been in the process of being drawn up at the time of the JP Morgan report. And, of course, as ESG financial advisors, JP Morgan would have been involved in the advice about this course of action.

So, if we take this agreement at face value, it says this:

JP Morgan put a value on ESG, in the event of a 4mpta sales deal into and LNG project, at well over $2.00. And yet they recommend to ESG that they sell NOW, and do so at a price of 90 cents worth of Santos scrip??? Sell before they do a long-awaited reserves upgrade. Sell before LNGN approvals. Sell now???

So, rather than wait and keep exploring and testing, grow their reserves, wait for gas prices to rise due to the carbon tax, and continue to work towards this 4mpta $1.56 sales agreement, JP Morgan advise ESG to give up, and sell themselves at a 40% VWAP on top of a low share price base. Not sell when the VWAP was 90 cents. Sell when the VWAP was at the lower ebb of around 70 cents.

Riiight...

Do you just think there might be more to this takeover scenario than meets the eye?

Either JP Morgan's advice to ESG, or analysis of ESG, is horribly flawed and poor. Or, more likely, they advised ESG to nominally support this Scheme of Arrangement, in the full knowedge that this 'deal would force other (known) parties to step in with a superior offer.

The more you think about this supposed deal with Santos, the less plausible it sounds ... it will not be consummated.

Yaq