I’ve been thinking about possible scenarios for the playing out...

I’ve been thinking about possible scenarios for the playing out of the endgame of this takeover. Most obvious is that no other bidders appear, the big banks take the arbitrage profit and the yes voters win the day at the meeting. Simon walks away with $4mill, and everyone is happy, except for the Hardman faithful, who will remain bitter and twisted for the rest of their days about being cheated out of their favourite company.

Next possibility is that a second bidder, who has been biding their time up until now, launches an on-market bid a few days before the meeting, prompting the big banks to abandon Tullow. If Tullow are caught off guard it could be all over before the meeting is held. If they are quick they may be able to cancel the meeting and the scheme of arrangement and launch a counter offer on market.

Third is that no other bidders appear and the big banks try to blackmail Tullow into raising the bid in order to get the votes. This may be dependent on sufficient of the small shareholders also voting No, hence my decision to vote that way – as far as I can see my No votes will either be completely irrelevant, or they may be useful to the bigger players in order to squeeze a higher price out of Tullow.

This scenario runs the risk of Tullow walking away, but I can’t see that happening. The big banks don’t want to be left holding a whole lot of HDR shares with no buyers, so they will be vulnerable to Tullow calling their bluff. Without a second buyer, the banks are in a weak negotiating position and they might get a small rise in the offer, but not a huge amount.

Tullow is in a much stronger negotiating position – if they were to lose the vote, the HDR share price would drop dramatically and Tullow would be able to buy a large proportion of the company on market at well below $2.02. They could then propose another scheme of arrangement with a higher offer price than 2.02 which would then surely go through, but Tullow’s average purchase price could well be cheaper than 2.02.

Of all the scenarios I have considered I cannot see one where there is a significant chance that HDR will drop substantially below 2.02 in the long term, so holding on seems fairly safe to me. In addition, todays trading, both in Australia and in the UK, seems to be a case of smaller shareholders selling out to the bigger players, so in this case the “follow the money” rule seems like a reasonable strategy.

I still think that there is a good chance of a second bidder appearing in the next 2 weeks. I don’t find it unusual that they would not have revealed their hand by now. Bidding early simply guarantees that your bid is likely to be bid over by another buyer. Bidding late restricts the chances that someone comes in over the top of your bid and maximizes the chances that Tullow will not mount a successful counter bid. It’s no different to winning an item on ebay, the best strategy is always to come in at the last minute with a reasonable bid and give the opposition as little time as possible to respond.

So from what I can see it is reasonably low risk to continue to hold and to vote no at the meeting. Anyone else have any plausible scenarios as to how else this might play out? I am interested to hear what these might be.