my view and recap

this is a extract from my "blog" elsewhere on Hardman, thought some might find it of interest. Beware - personal view only and many assumptions.

I have been watching the Hardman (HDR) takeover with interest. Early production disappointment with the Woodside operated Mauritanian oil assets lead to a sharp sell off. This was just after a capital raising had been completed in London and resulted in a sell down from $2.40 to roughly $1.20 early this year. Significant short selling occurred as part of this sell off.

Enter Tullow Oil of Ireland with a bid pitched at a “60% premium” to the short term low. The bid has a $2.02 cash value or a cash/script value above this at around $2.12. Because this is a Scheme of arrangement style bid Tullow can not purchase on market for above $2.02. Thus far they have acquired only a few percent of HDR. What interests me is the activities of four large investment banks—Merrill Lynch, Deutsche Bank, UBS and JP Morgan. They have and continue to build a substantial holding of HDR, enough to likely decide the outcome of the bid.

These banks won’t share the game plan with us mortals, my belief is that given a number of the banks are close to Tullow they will negotiate an outcome that benefits themselves and Tullow. I believe this will be in the form of a modest increase in the bid price to secure the vote and win the day. It should be noted that the independents expert report valued HDR well below $2, however this report ascribed very little value to the recent Oil find in Uganda which is at the heart of this takeover. The dominant oil player in this new region (4 strikes from 4 holes for the region and unbounded in most directions) is Tullow, so they are best placed to know the true value of the finds. Whilst Tullow has more acreage, Hardman has higher leverage to the finds being A. Much smaller capitialisation and B. Holding operatorship over the blocks shared with Tullow.
Scenarios :
Worst Case A>, No vote, Tullow walks (15% prob) HDR estimate =$1.55 (allowing for recent developments in Guyane and Uganda)
Probable Case B>, Bid raised to $2.35 under pressure from the usual suspects (60% prob)
Other Case C. Bid stands (25% prob)
Risked Value = 0.15x1.55+0.6x2.35+0.25*2.12 = $2.17.

read the red stuff

Ralphi