re: Ann: Indicative proposal - due diligence ... Hi All,I have...

re: Ann: Indicative proposal - due diligence ... Hi All,

I have been watching the WCL threads with much interest since early February. Thanks to all the posters for their informative observations and opinions.

I must admit it has been hugely frustrating watching this ‘takeover’ unfold at such a snails pace. The prolonged nature of the “due diligence” process has lead me to the conclusion that one of two potential scenarios are going on – and neither of them relate to due diligence (let’s face it - four months to undertake due diligence, which apparently is still not completely finished, is farcical. If I was on the LNG’s Board I would be asking serious questions about the use of internal resource and the cost of external advisors to maintain a due diligence process for so long).

The first of these potential scenarios is that LNG is leading WCL up the garden path in order to strengthen its negotiating position with potential gas suppliers. Given that the NPV of a PJ of gas delivered by buying WCL is likely to be significantly lower than the NPV of a PJ of gas delivered via a GSA, LNG can present the fact that it is doing due diligence on WCL (as an alternative gas supply) when negotiating with potential gas suppliers in order to receive more favourable pricing. Obviously for LNG, having a prolonged due diligence process plays right into LNG’s hands if this is the case. I sure WCL management will be wise to this ploy and if it appears that LNG is just playing for time with no apparent urgency then I would urge WCL to put a near term limitation on access to the due diligence room and announce this to the market. Once this is done, LNG would lose a degree of negotiating leverage with potential gas suppliers and in theory this would likely result in LNG having to pay a higher price for its gas, or alternatively, increase the probability of a binding takeover for WCL (as the alternative to a GSA).

However, we probably need to give WCL management credit that they would be able to spot this ruse and that what we are seeing is the second of these potential scenario – there is a large price gap between the expectations of WCL’s large shareholders and those of LNG and its associates, and there are attempts to close this gap.

I find this a little bit surprising as I would have thought that LNG would have had side conversations with the larger WCL shareholders at the same time that LNG started due diligence in an attempt to ‘lock-in’ as many large shareholders as possible prior to any potential takeover (i.e. to ensure a successful takeover).

These conversations may have happened, but it would seem doubtful that LNG got many takers at the indicated price of 65cps given commentary in the media.

In the interim WCL has had a reserve upgrade, which means that any previous pricing gap between LNG and WCL’s large shareholders is likely to have grown even larger. I assume that where LNG had originally been working with the Chinese on the basis of a takeover costing $160m, the reserve upgrade and higher shareholder’s expectations are making it head up towards double this. Assuming that LNG had to go back to the Chinese to work on a higher bid and the Chinese had to re-instigate their traditionally long approval processes for extra funding, this may explain for the long ‘due diligence’ period.

So the question is has LNG been able to close the pricing gap with WCL’s large shareholders. If so, then is an offer just a question of Chinese process and therefore timing? Or is the pricing gap just too large to bridge? – in which case we could circle back around to the first scenario I outlined above around LNG using WCL ‘due diligence’ as leverage in its negotiations with third party gas suppliers.

Either way – I think that it is time to close the due diligence room down very shortly. More than enough time has passed to undertake due diligence and it appears to me that given the passage of time the takeover (if any) is not being driven by due diligence matters. It does WCL no benefit to keep the due diligence room open any longer (unless it is for a third party), unless of course LNG is actually still conducting genuine due diligence. But if this is the case then I would suggest that if it is going to take four plus months to undertake due diligence, then have LNG actually got the capability to get a bid on the table?

I would love to be sitting around the WCL Board table at the moment in order to understand their strategy for dealing with the LNG indicative proposal and also for other "options to maximise value for shareholders”. It’s all a bit vague at the moment.

Watching in the West
Coaster