Extract Resources directors demand an offer from Chinese
EXTRACT Resources directors yesterday made it clear they want the Chinese group CGNPC Uranium Resources to make a downstream takeover bid for the company or they will oppose its upstream bid for Extract's major shareholder Kalahari Minerals.
If the corporate regulator the Australian Securities & Investment Commission agrees and requires a downstream bid for Extract it would more than double the cost to CGNPC, from $1.2 billion to $2.7bn, or more.
CGNPC would not be required to also bid for Extract if Kalahari was listed on the ASX or a foreign exchange approved by ASIC.
However, Kalahari is listed on the London Stock Exchange's secondary market AIM and the Namibian Stock Exchange neither of which is on ASIC's approved list.
Therefore, CGNPC is required to also make a comparable bid for Extract, unless ASIC is prepared to relieve it of that requirement.
CGNPC, in any case, needs relief from ASIC to acquire more than 20 per cent of Kalahari, because once it does so it would also acquire a deemed relevant interest in Kalahari's 42.79 per cent shareholding in Extract, and that would breach the fundamental takeover requirement, Section 606 of the Corporations Act, which prohibits a party from acquiring more than 20 per cent of a company without first making a takeover bid to all shareholders.
CGNPC has stated that it intends to seek relief from ASIC to enable it to acquire more than 20 per cent of Kalahari, but Extract said yesterday it would make submissions that the relief not be granted unless the Chinese group also makes an offer for Extract on terms no less than equivalent to those offered to Kalahari shareholders.
CGNPC at this stage has not made a firm offer under the London Takeover panel's rule 2.5. Instead it has alerted the market to a possible offer under rule 2.4.
Under the British rules firm bids are allowed to have only limited conditionality. Offers can be made conditional on Competition Commission approval, but other regulatory approvals need to be obtained before a firm bid can be made. Minimum acceptance conditions are allowed but, unlike Australia, financing must be securely lined up before making a firm offer.
That's why News Corporation is yet to make a firm bid for the 61 per cent of British Sky Broadcast (BSkyB) that it does not already own. Nine months ago News proposed an offer price of 700p ($11.60) a share, but is yet to make a firm bid because it is still going through the approvals process, although that appears to be nearing finality with the British government saying it would accept undertakings from News to spin off Sky News in lieu of a referral to the Competition Commission.
BSkyB directors have also indicated that News will have to offer more than 800p ($12.80) a share to obtain a board recommendation.
Under ASIC's regulatory guide 71 the regulator will normally require a downstream bid if the holding in the downstream company comprises more than 50 per cent of the upstream company's assets and control of the downstream company is one of the main purposes of the bid for the upstream company.
The previous occasion where ASIC required a downstream bid was probably ROC Oil's bid for Anzon Aust in mid-2008.
There were similarities to the Kalahari situation. Anzon was 50 per cent owned by Anzon Energy (AEL), a British company that was also listed on AIM and therefore ROC did not have the benefit of the downstream bid exemption.
ROC approached ASIC before making an offer and obtained relief to acquire more than 20 per cent of AEL, providing it also bid for Anzon. So ROC agreed a scheme of arrangement for AEL, offering 1.33 Roc shares for each AEL share and a concurrent off market bid for Anzon, offering 0.792 ROC shares plus 5c cash for each Anzon share, which was deemed to provide the equivalent value of the AEL proposal.
The stake in Extract is Kalahari's only significant asset, and accounts for more than 90 per cent of the value of its assets. It's clear that acquisition of the 42.79 per cent shareholding is the main purpose of the potential CGNPC offer.
If, as seems likely, ASIC requires a downstream bid for Extract, its normal practice is to require an independent expert to assess the equivalent see-through value to establish an offer price.
CGNPC is proposing an offer price of 290p ($4.64) a share, which would work out to the equivalent of around $10.75 an Extract share. Kalahari directors have stated they will recommend acceptance if CGNPC makes a firm bid at that price and will accept for their 7 per cent stake in the absence of a superior proposal.
Extract shares were selling at $9.26 before the possible bid for Kalahari was announced. The shares rose 68c on Tuesday, or 7.3 per cent, and gained a further 79c, or 8 per cent, yesterday, to close at $10.73.
Extract's share price probably also includes an element of speculation on Rio Tinto making a higher counter-offer.
Extract is developing the Husab project in Namibia, which is one of the world's best high-grade uranium deposits, and is close to Rio's neighbouring Rossing uranium mine. Moreover, Rio and Extract have been holding discussions about combining Husab and Rossing.
Adding grist to the mill, Rio owns 10.8 per cent of Kalahari and 14.2 per cent of Extract, while the Japanese group Itochu also has cross shareholdings -- 13 per cent of Kalahari and 10 per cent of Extract.
CGNPC, a state-owned nuclear power provider, is keen to secure uranium supplies and if it acquires Kalahari/Extract it would partner in the development of Husab. That doesn't necessarily mean it would oppose a combination of Husab and Rossing if it could see benefits from such an outcome.
CGNPC did not approach ASIC before announcing it was considering a bid for Kalahari. That's probably because it is not in a position to make a firm bid, because it first needs to secure a number of regulatory approvals.
A bid would require the approval of Foreign Investment Review Board (FIRB) or the federal Treasurer Wayne Swan and the approval of several Chinese regulatory authorities -- the National Development & Reform Commission of China (NDRC), State-owned Assets Supervision & Administration Commission (SASAC), Ministry of Commerce of China (MOFCOM) and the State Administration of Foreign Exchange (SAFE).
The Chinese regulatory authorities are notoriously tardy and can take several months to make a decision.
CGNPC has set a "drop dead" date of May 3 in which to obtain the necessary approvals to make an offer. If it is unable to proceed with a firm bid by that date it may be required, under the terms of an implementation agreement, to pay Kalahari a break fee of pound stg. 7.5 million ($12m).
However, the agreement also provides that the drop dead date may be changed to "such other date" as CGNPC and Kalahari agree upon.
EXT Price at posting:
$10.73 Sentiment: None Disclosure: Held
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