British truth in takeovers regime trips up Kalahari
-Bryan Frith -From: The Australian -May 05, 2011 12:00AM
KALAHARI Minerals has run foul of the British Takeover Panel's rigid application of its truth in takeovers regime.
Two months ago Kalahari announced it was discussing a possible recommended cash bid of 290p ($4.40) a share by CGNPC Uranium Resources, which is wholly owned by state-owned China Guandong Nuclear Power.
Kalahari's only significant asset is a 42.79 per cent stake in Extract Minerals, developer of one of the world's best high-grade uranium deposits at the Husab project in Namibia, adjoining Rio Tinto's Rossing uranium mine.
Kalahari, which is listed on the London Stock Exchange's secondary market AIM and on the Namibian Stock Exchange, is a British-incorporated company and therefore is subject to the British takeover rules.
A bid for Kalahari could also require a comparable takeover bid for Extract, under the downstream provisions of the Corporations Act. CGNPC and Extract have been talking to ASIC on whether a downstream bid will be required but it is yet to decide.
ASIC is unlikely to rule until it has to, but under its guidelines a downstream offer would almost certainly be required because the Extract stake represents more than 50 per cent of Kalahari's assets and the main purpose of the bid is almost certainly to secure Kalahari's stake in Extract.CGNPC could have simply bid for Extract, but acceptance would have created a hefty capital gains tax bill for Kalahari.
When the bid was announced a 290p offer equated to a see-through price for Extract of $10.75 a share. Since then the Australian dollar has appreciated further against sterling, which would reduce the offer price to $4.40 a share and the see-through price for Extract to about $10.20 a share.
However, the world has changed dramatically since then, with the crisis at Japan's nuclear power plant at Fukushima, following a devastating earthquake and tsunami, creating uncertainty in the uranium sector.
Added to that are concern at last week's announcement by Namibia's mining minister that uranium was among a number of minerals that had been declared strategic to allow exclusive exploration and mining of them by the state-owned Epangelo Mining. The Namibian president has since sought to ease concerns by declaring that new mining legislation won't be a move towards nationalisation and existing rights won't be affected.
Japan's nuclear crisis triggered a sharp fall in the price of uranium shares and Russia's state-owned uranium miner JSC Atomredmetzoloto (ARMZ) took advantage of that to force an agreed reduction of 12 per cent in the price of its bid for uranium explorer Mantra Resources, from $8 a share to $7.02 a share.
It comes as no surprise that Kalahari has been adopting the same tactic.
The implementation agreement between CGNPC and Kalahari set a drop-dead date of May 3 in which to turn its possible offer into a firm offer, or it may be required to pay a break fee of pound stg. 7.5 million. However, the deadline could be changed to "such other date" as the parties agreed.
The deadline fell due yesterday and Kalahari disclosed that following the crisis at the Fukushima plant it had agreed with CGNPC on a proposed 6.9 per cent reduction in the possible offer price to 270p a share, which would equate to a see-through price for Extract of $9.40-$9.45 a share.
However, the British panel's executive has ruled that CGNPC cannot make a firm offer at 270p because it did not reserve the right to reduce its proposed offer price at the time the possible offer was announced.
Kalahari is appealing against the ruling and, in the meantime, the parties have amended certain terms of the implementation agreement, including extending the deadline for announcement of a firm offer to June 17.
However, Kalahari has also retained the right to make an offer at 290p a share, irrespective of the outcome of the appeal.
Extract shares were selling at $9.26 before the possible bid was announced but closed on Tuesday at $6.68. The share price rose 95c, or 14 per cent, yesterday to $7.64 on news CGNPC was proposing a lower offer price rather than walking away, but that's still well below the see-through, reflecting uncertainty as to whether a firm offer will eventuate.
It must be doubted that Kalahari will succeed in its appeal as the panel is usually fairly rigid in applying its rules.
An example is the 1999 takeover contest between two British companies, Dotterel and Miller for Cala. Dotterel kicked off the bidding at 165p a share only to be topped at 175p by Miller. Dotterel came back at 190p.
Miller then bid 200p and said that was final, but reserved the right to go to a maximum of 210p if Dotterel or another party topped its bid.
Dotterel approached the panel executive and obtained a ruling that if it matched Miller's 200p offer price, Miller would be unable to raise its bid because it had reserved the right to increase only if its bid was topped.
Miller appealed to the full panel, which ruled against it despite accepting that Miller's wording had followed precedent and, surprisingly, there was no recorded instance of a matching bid having been made in such circumstances. The rival bidder had always made a higher offer.
Although Dotterel had clearly sought to exploit the situation, the full panel ruled that the wording of a no-increase statement must be "precisely drawn" and that Miller could have given itself the right to go up if its bid was matched, but failed to do so.
Although Cala shareholders might be disadvantaged by being prevented from obtaining the highest price, the full panel considered it was more important to "preserve an orderly framework" for the conduct of takeovers, and to prevent shareholders and the market from being prejudiced by misleading statements and any lack of certainty.
In this instance, the panel executive noted that CGNPC, "with the agreement of the Kalahari board" chose not to reserve the right to change the terms of the possible offer when it was announced on March 7.
In fact, it is suggested that CGNPC and its adviser, Deutsche Bank, raised the issue of reserving the right to change the terms, including the possibility of reducing the price but having just negotiated a price of 290p a share Kalahari wasn't in a mood to consider the possibility of agreeing to a lower price in any circumstances. What could possibly happen to justify a reduced offer price? What indeed.
If the panel dismisses the appeal one option for the parties would be to withdraw the possible offer and wait three months, after which the Chinese group could come back with a new proposal.
That may leave the way open for Rio Tinto to either tie up a joint venture with Extract, or perhaps make an offer for the company.
Rio owns 10.8 per cent of Kalahari and 14.2 per cent of Extract, so it could prevent compulsory acquisition of both companies, while Japan's Itochu also has cross-shareholdings -- 13 per cent of Kalahari and 10 per cent of Extract.
Extract announced in February that it was holding discussions with Rio about a possible combination of the Husab project with Rossing.
A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.
(20min delay)