equities research, page-2

Two brokers same opinion ! one says hold one says sell ?

Event
Last Update - 14/12/2006

HDR shareholders vote on Tullow’s takeover scheme on December 18. To recap, HDR shareholders are being offered A$2.02ps cash or alternatively 0.22289 new LSE listed Tullow shares subject to a maximum of 65m Tullow shares. The HDR board unanimously recommends the offer. KPMG’s Independent Expert Report says the offer is in the best interests of shareholders and is fair. If voted through, as is likely, shares will cease to trade on December 20.

Tullow’s share price is currently GBP4.03 (A$10) after previously hitting a November high of GBP4.28. The scrip offer is therefore worth A$2.23 per HDR share. The scrip limit covers only 292m shares or 40% of HDR’s 728m total. The 60% or 436m share balance is limited to the $2.02ps cash offer. The weighted average of cash and scrip equates to $2.10 per HDR share, close to the current $2.08 market price. This could be worth more to those who elect to receive scrip if a significant percentage of shareholders choose cash only, a likely scenario.


Business Impact: Given the diminishing time to potential suspension we recommend clients now Sell on market, at prices equal or above the $2.02ps cash offer price. We downgrade our recommendation from Hold. The chance of a competing bid is now slim and if the bid scheme were voted down, the share price would likely pull back dramatically. We don’t see Tullow scrip as being of particular interest to clients outside the current arbitrage strength it provides. Our valuation is $1.98ps, marginally below the cash bid offer. Selling now risks a 12th hour competing bid, a miraculous exploration result, or a dramatic rise in Tullow’s price in the next five days. The risks of not selling now are that the scheme is voted down and HDR price falls or simply that the price falls to the $2.02 cash bid point, below the current $2.08ps on offer.

Forecast Impact: --

Recommendation Impact: Downgraded. (Last updated: 14/12/2006

Event Analysis

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Clients with special tax concerns may look to the scrip offer as an alternative but we have no specialist knowledge on Tullow, or tax advantage/disadvantage, and expert advice should be sought before taking that particular course of action.