THE fallout from Japan's nuclear crisis on pending uranium deals is already making itself felt with yesterday's announcement that Russia's state-owned uranium miner JSC Atomredmetzoloto (ARMZ) is unlikely to proceed with its proposed $1.6 billion acquisition of the uranium explorer Mantra Resources in its present form. Investors are also concerned about whether China's CGNPC Uranium Resources, which is wholly owned by the state-owned nuclear power producer China Guandong Nuclear Power (CGNPC), will go ahead with a mooted $1.2bn bid for the AIM-listed Kalahari Minerals and a potential follow-on downstream offer for Extract Resources, which would take the aggregate cost to $2.7bn.
Kalahari's only significant asset is a 54 per cent controlling shareholding in Extract. Because acquisition of Kalahari would deliver CGNPC more than 20 per cent of Extract, Australia's corporate regulator ASIC would normally require a comparable downstream offer to be made for Extract.
Although CGNPC and Kalahari have entered into an implementation agreement which, among other things, provides for break fees, the Chinese group has not yet announced a firm bid. It's only possible under Britain's takeover rules and CGNPC could therefore walk away if it wished.
CGNPC has mooted a potential bid price of 290p a share ($4.64) for Kalahari, which would be the equivalent of around $10.75 in Extract shares.
Extract shares were selling at $9.26 before the possible bid for Kalahari was announced and rose to $10.73 but have been tumbling since the massive earthquake and devastating tsunami precipitated Japan's crisis with its Fukushima nuclear plant.
Extract's share price fell a further $1.83 a share, or 21.5 per cent, yesterday to $6.64 -- more than $4, or close to 40 per cent of the value of a downstream offer.
Extract's share price might also have affected by the news that China's State Council had suspended new nuclear plant approvals pending strengthened safety standards.
ARMZ in December announced a recommended cash offer for Mantra of $8 a share, by way of a scheme of arrangement. The two companies entered into a scheme implementation agreement (SIA). The Canadian-based Uranium One,in which ARMZ recently acquired a 51 per cent shareholding, has a call option to acquire Mantra for a consideration equal to ARMZ's acquisition cost plus certain additional expenditure.
Mantra, which is listed on the ASX and the Toronto Stock Exchange, indicated yesterday that ARMZ was seeking to invoke one of the conditions precedent in the SIA -- a material adverse change (MAC) condition.
ARMZ has stated that in its opinion the recent incidents at the nuclear power plant in Fukushima are likely to have a material adverse effect on Mantra and the MAC condition would not be capable of satisfaction.
If so, that would provide grounds for ARMZ to terminate the proposal.
However, it has not done that -- at least as yet. Instead, the Russian group has indicated that it is willing to explore how the transaction might proceed "by way of an alternative approach" in accordance with its obligations under the SIA.
Translated, that probably means that ARMZ might be prepared to proceed with an offer at a lower price.
Mantra did not indicate in yesterday's announcement whether it agreed with ARMZ's assessment that Japan's nuclear crisis would trigger the MAC clause.
However, the uncertainty created by ARMZ's stance has had an immediate impact -- with Mantra's share price yesterday slumping a further $1.88, or 28 per cent, to $4.81. At that price it's $3.21 a share, or 40 per cent, below the proposed offer price of $8 a share.
ARMZ's tactic of seeking to force renegotiation of the offer terms for Mantra by implicitly threatening to terminate the SIA again highlights that schemes of arrangement do not provide some of the investor protection measures available under the takeover provisions of the Corporations Act.
This commentator yesterday pointed to the tactics of the Hong Kong-based Regent Pacific in purporting to call off its proposed scheme acquisition of BC Iron (BCI) on the grounds that the board had formed the opinion that BCI's largest shareholder, Consolidated Minerals -- controlled by the Ukrainian billionaire Gennady Bogolyubov -- would prevent the transaction by voting against it. As a result, the Regent Pacific board had withdrawn its recommendation of the proposed transaction.
Regent Pacific's view was based on an article on a US business website which claimed that Bogolyubov was "flatly opposed" to the transaction and had the votes to defeat the proposal.
Yet ConsMin had already told Regent Pacific in writing that the company had not yet made a decision and was awaiting the explanatory memorandum and independent expert's report, without which it was impossible to make a fully informed decision.
Regent Pacific claimed that the withdrawal of its board recommendation gave it the right to terminate its SIA with BCI but that's not supported by the summary of the SIA previously released to the market. It contained a number of grounds for termination but withdrawal of the Regent Pacific board's recommendation was not one of them.
BCI yesterday obtained a trading halt pending an announcement by the company following the conflicting statements from Regent Pacific and ConsMin. If this was a takeover bid, Regent Pacific would almost certainly fall foul of Section 631 of the Corporations Act which makes it an offence if a person fails to proceed with a takeover bid within two months of the announcement of an offer.
If a bidder pulls out other than as provided for under the SIA, that would be a breach of contract and the target would be entitled to sue for losses but the difficulty would be in proving the target had suffered much loss.
Target shareholders would suffer losses but they are not parties to scheme contracts.
Target companies have sought to protect themselves by requiring reverse break fees and they are included in the proposed BCI and Mantra schemes -- $500,000 in the case of BCI and $11.6 million in the case of Mantra (with no further liability under the SIA).
AWB and its advisers Deutsche Bank and Freehills last year pioneered an investor protection for target holders by effectively duplicating Section 631 in the SIA first with its agreement with Graincorp and then with Agrium when it came up with an improved, and successful, offer.
The SIA provided that if AWB terminated the proposal because of a material breach by Agrium, then any AWB shareholder who dealt in AWB shares in reliance of the announcement of the transaction and suffered loss or damage as a result of it not proceeding, may recover that loss or damage from Agrium.
This commentator suggested that the AWB solution should be the standard for SIAs going forward. Unfortunately BCI and Mantra don't appear to have included this reform. The term "appear" is used because the complete terms of the Regent Pacific/BCI and ARMZ/Mantra SIAs have not been released, only summaries of the key terms.
Arguably the target companies are required by their continuous disclosure obligations to provide the full SIA to the ASX in order to maintain an informed market, and they should be required to do so by the ASX or ASIC.
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