REG Nelson's Beach Petroleum yesterday demonstrated once again that there is no such thing as a white knight, only shades of grey. In mid-August Adelaide Energy announced a strategic alliance with Beach to develop the two companies' interests in the Nappamerri Trough in the Cooper Basin.
As part of that arrangement Adelaide proposed to issue 75 million shares, or 19.95 per cent of the capital, to Beach at an above-market price of 16.5c a share, of which 14 million shares could be issued immediately, with the remaining 59.5 million requiring shareholder approval.
Beach would also be issued with 75 million five-year options, exercisable at any time in the option period at an exercise price of 40c a share, also subject to shareholder approval.
Adelaide directors, who hold about 12 per cent of the capital, said they would vote their shares in favour of both the share and options issue to Beach.
At the time, Adelaide disclosed that management had entered into preliminary merger discussions with Somerton Energy, which envisioned a scrip bid by ADE for Somerton.
The talks were said to be incomplete, with no understanding as to price, and might not lead to a transaction. An update was promised, "as and when negotiations progress", but nothing has been heard since.
On September 30 Adelaide shareholders approved the issue of the additional 59.5 million shares to Beach but, surprisingly, rejected the options issue.
Yesterday Beach weighed in with an unconditional on-market cash offer of 20c a share for the remaining 80 per cent of Adelaide, which would cost it $74 million.
The offer price represented a premium of 51.5 per cent to Adelaide's one-month volume-weighted average price and a premium of 42.9 per cent to the previous closing price of 14c.
An on-market offer requires a sharebroker, in this case Macquarie Equities, to stand in the market for at least one month and buy all shares offered at the bid price.
The offer doesn't open until November 22, but Macquarie yesterday exercised its right to start buying immediately.
It's a rarely used form of takeover, as the market invariably pushes the share price marginally above the offer price in an attempt to force the bid price higher.
If any shares are purchased at a higher price, that automatically becomes the new bid price, but
The offer doesn't open until November 22, but Macquarie yesterday exercised its right to start buying immediately.
It's a rarely used form of takeover, as the market invariably pushes the share price marginally above the offer price in an attempt to force the bid price higher.
If any shares are purchased at a higher price, that automatically becomes the new bid price, but target holders who have already sold miss out on the increase, unlike an offer market bid, under which holders who have accepted automatically receive any increase in the offer price.
The Adelaide board's initial reaction was to advise the shareholders to take no action pending a full evaluation of the options available to them.
Later in the day the directors announced they had decided not to accept the offer "at this time" for their holdings, and had begun investigation of realistic alternatives with a view to maximising the final outcome for shareholders.
That suggested the target board did not consider the Beach bid to be friendly.
Moreover, if the bid was friendly, it wouldn't seek to pressure target holders with an on-market bid.
The Adelaide board implied there was no urgency for target holders, as the offer ran until at least December 22 , which gave them an extended period to consider the merits, or otherwise, of the offer.
However, the shareholders paid little heed and stampeded for the exit, with almost 127 million shares, or 27 per cent of the capital, changing hands. Of those a handful went at 20.5c a share, but the remainder sold at the offer price of 20c.
It appears property tycoon Lang Walker, a longstanding Adelaide shareholder, led the charge.
Walker holds his shares through Auckland Trust Co, as trustee for Second Pacific Master Superannuation Fund, and has been a recent buyer.
On Friday Auckland Trust notified a change in substantial holding, which showed that between October 10 and last Friday it had picked up almost six million shares at 13c-14c each to take its holding to 85.033 million shares or 18.31 per cent.
Yesterday's sale included a parcel of 40 million shares and another parcel of 45.033 million, which tallies with Walker's holding.
As a result of yesterday's stampede Beach more than doubled its stake in one day to 44.23 per cent of Adelaide, which means control has already changed hands
It almost certainly means the target board will be unable to find a counter-bidder or any other "realistic alternatives" for Adelaide shareholders.
The Beach bid is designed to consolidate the two companies' joint-venture interests in the Nappemerri Trough, which has potential for a gas discovery on the scale of Queensland's coal-seam gas finds.
Beach owns 90 per cent and Adelaide 10 per cent of PEL218, which is in South Australia near Moomba, and 40 per cent of the adjacent ATP855P, which is across the border in Queensland. Adelaide has 20 per cent and Icon Energy 40 per cent.
They cover an extensive area of close to 405,000ha.
Attention to date has focused on the potential for production of shale gas but Beach considers the greatest potential is in what it describes as a "basin-centred gas play".
Essentially that's where, unlike Queensland's coal-seam gas, the bottom of the trough contains not water but is filled with highly pressurised gas.
This type of structure is common in some gasfields in east Texas.
The joint venture has already drilled two wells and stimulation of seven zones has produced a combined flow of about two million cubic feet daily.
It is hoped that planned horizontal wells will boost the potential flow to 15 million to 25 million cubic feet daily.
By way of comparison, the best of the Cooper Basin flows is about 15 million cubic feet daily.
The second well is scheduled to be tested next month. Moreover, a rig is being brought in to drill deep vertical wells, as well as a rig from Canada to drill horizontal wells.
Between now and the end of next year there are plans to drill five vertical wells and three horizontal wells and a further six horizontal wells in 2013.
Capital expenditure for the exploration program is expected to cost $200m or more, of which Adelaide would need to find $20m to $25m.
Beach considers that its bid will remove funding pressure on Adelaide and that instead of the much larger Beach continuing to inject funds into Adelaide to enable it to meet its share of the funding it makes more sense to acquire the company.
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