Kalahari takeover offer must inevitably lead to move on local miner
Bryan Frith From: The Australian March 09, 2011 12:00AM
URANIUM hopeful Extract Resources yesterday advised shareholders it was reviewing the implications of a pound stg. 756 million ($1.2 billion) bid for its major shareholder Kalahari Minerals. One of those implications may be that, under the Takeovers Code, Extract also ends up receiving a bid. It's all to do with downstream bid provisions of the Corporations Act. Kalahari is a British incorporated company listed on the London Stock Exchange's secondary market AIM and also on the Namibian Stock Exchange (NSX).
Kalahari's major assets are a 43 per cent interest in Extract and a 45 per cent stake in North River Resources, which is also listed on AIM.
Under the Corporations Act, if a party acquires more than 20 per cent, then it is deemed to have the same relevant interest as Kalahari has in other shares.
CGNPC Uranium Resources, which is wholly owned by China Guandong Nuclear Power, a state-owned nuclear power producer, is discussing a possible recommended cash bid for Kalahari of pound stg. 2.90 a share, a premium of 11 per cent to the previous share price and 38 per net to the six month VWAP.
But if CGNPC were to acquire more than 20 per cent of Kalahari it would also acquire a deemed relevant interest in 43 per cent of Extract, and that would fall foul of section 606, which prohibits a party acquiring more than 20 per cent of a company without first making a takeover offer to all shareholders.
Section 611 (14) provides an exemption from the need for an upstream bidder to also bid for the downstream company. It applies if the upstream company is listed on the ASX or a foreign exchange approved in writing by the corporate regulator ASIC.
This issue arose recently with the bid for Germany's Hochtief by the Spanish group ACS. Hochtief owns 54.48 per cent of Leighton, but as Hochtief is listed on Deutsche Borse and it is an ASIC-approved foreign exchange, no downstream bid for Leighton was required.
But AIM and NSX, on which Kalahari is listed, are not on ASIC's approved list. On the face of it, a bid by CGNPC for Kalahari will also require a takeover bid for Extract.
CGNPC can apply for relief to exempt it from the requirement to bid for Extract -- in fact, it will need to apply for relief to enable it to acquire more than 20 per cent of Kalahari.
But it's unlikely the Chinese group would receive unrestricted relief. More likely is that it would obtain restricted relief and, going by ASIC's policy, that would be likely to include a requirement for a full bid for Extract.
ASIC will normally require a bid for the downstream company 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 a main purpose of the downstream acquisition. The stake in Extract is Kalahari's only significant asset. Its stake in North River has a market value of only pound stg. 11m while the company also has between pound stg. 20m and pound stg. 25m.
Extract shares were selling at $9.26 before the possible bid for Kalahari was disclosed and at that price Kalahari's stake was valued at $850m. The stake accounts for more than 90 per cent of Kalahari's assets and that is reflected in Kalahari's market capitalisation, which stood at $1bn before news of the possible bid. It's crystal clear that the main purpose of a bid by CGNPC would be to secure Kalahari's stake in Extract.
The Chinese group admits as much. It says that, given China's emphasis on diversifying energy sources, and its intended increase in nuclear generating capacity to lessen reliance on fossil fuel sources, it is committed to supporting development of new supply capacity in the natural uranium market.
Extract is developing the Husab project in Namibia, which is one of the world's best high-grade uranium deposits.
Where ASIC requires a follow-on downstream bid the offer price is set by an expert at the "see through" value implied by the upstream bid. ASIC also requires a cash bid, or a scrip offer with a cash alternative.
Based on the value of the proposed bid for Kalahari the value of the remaining 57 per cent of Extract would be $1.59bn, or about $10.75 an Extract share. That would put a total value on a bid for both Kalahari and Extract at about $2.79bn. Extract's share price jumped 68c, or 7.3 per cent yesterday, to $9.94, reflecting speculation on the likelihood of a downstream bid.
In the joint announcement to AIM, CGNPC says it will seek relief from ASIC to acquire more than 20 per cent of Kalahari and if, after discussions with ASIC, it proposes to make a downstream offer to Extract shareholders it would only be likely to be made if the possible offer proceeded and became unconditional.
Moreover, any bid would be likely to be subject to the Kalahari bid becoming unconditional and subject to usual defeating conditions, including no prescribed occurrences. The Chinese group would also require foreign investment approval for both the Kalahari offer and any offer for Extract.
It would also be made with substantially equivalent effective benefits to those that are offered to Kalahari shareholders -- that is, the see-through price.
While CGNP and Kalahari are still in discussions about a firm offer, the Kalahari board has indicated that if a firm bid is made at the suggested offer price the directors will recommend acceptance. Those Kalahari directors who own 7 per cent of the company have given irrevocable undertakings they will accept for their holdings, subject to there being no superior proposal, representing an improvement of 5 per cent to value of the possible offer.
Kalahari and CGNPC have also entered into an implementation agreement that includes provisions for Kalahari and CGNPC to pay the other a break fee of pound stg. 7.5m in certain circumstances. That would suggest a high degree of confidence that a firm bid will be made.
CGNPC's statement that it intends to be a partner in the development of the Husab project has possible implications for Rio Tinto. Late last month Extract announce that it was holding discussions with Rio about a possible combination of the Husab project with Rio's neighbouring Rossing uranium mine and was also holding discussions with Kalahari to explore options that may simplify the Extract/Kalahari shareholding structure.
The talks with Rio are still under way, but the arrival of CGNPC on the scene may complicate matters. Rio owns 10.8 per cent of Kalahari and 14.2 per cent of Extract, so it could prevent compulsory acquisition of both companies.
The Japanese group Itochu also has cross-shareholdings -- 13 per cent of Kalahari and 10 per cent of Extract.
Rio is already facing uncertainty over another corporate move, it's $3.9bn takeover bid for Riversdale Mining, which owns major coking coal deposits in Mozambique. Rio began with its foot on 14.9 per cent but to date has been stymied by Riversdale's two major shareholders, the Indian steelmaker Tata and the Brazilian steelmaker CSN.
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