With most mergers, there is often a dominant partner in the transaction and it so it is in this case with Range effectively taking over IOP (however there is a twist here and I will come onto that later). The resultant company will see existing Range holders owning 62% of the consolidated company.
I have wanted to cut through the bluster and knee-jerk reaction here and get to the crux of the transaction and what really matters – shareholder value - essentially did we get a good deal.
THE PRICE
1. The terms of the merger with IOP being valued at AUD105m sees Range take out IOP at effectively 8.9cents a share – a 48% premium to their last traded price.
2. This is typically at the low end-of-the-scale for T/O premiums
3. I am not delighted by this as I would want this price to be lower but I also ask myself the question as to whether Range holders would be happy to be taken out at this premium to our price on suspension? That would mean a T/O price of 5.77p a share for RRL which I doubt would satisfy most RRL holders
4. Additionally if we look at IOP’s market cap in the last 10 months (since the removal of listing conditions) it has fluctuated between AUD71m and AUD142m so we have a take-out price at the mid-point which is not bad considering the main factor decreasing their price was cashflow concerns which are resolved through the merger (albeit through Range’s munificence!)
5. Another reason IOP’s SP has stayed low at 6cents is (similarly to Range) the dearth of operation news. This is all in backlog (updates on 9 wells over the winter need to be provided)and the results will greatly determine whether we have got a bargain or not (Pete will know this information though
6. We need to also factor in that being on a lowly exchange such NSX (think PLUS markets) will always have a suppressing influence on a share price
7. In conclusion I think the price pretty reasonable – not amazing – but a decent deal – much lower and I don’t think Timis would have gone for it (his 38% basically means what he says goes with voting this through)
WHAT’S IN IT FOR RANGE?
1. Biggest plus for Range is that we get a management team with exemplary credentials – Chris Hopkinson and Pierre Godec
2. A highly prospective additional resource base – yes we have heard that before – and I would have probably preferred on balance for us to focus on what we’ve already got. However as mentioned earlier if the 9 winter wells in Russia have good results (which should be known now to both negotiating parties – along with QUN135 and MD248 no doubt) then this could be quite a coup
3. A credible plan with the right people for monetising that resource base – see Chris Hopkinson’s interview from back in November below:
CH: “We have plans this winter season [i.e. this past few months – remember IOP have a huge backlog of news also] to expand that by 9 wells including 3 new drills and ramp our production up to 4,000bopd by the end of next year [2013]
Interviewer: “4,000bopd? That’s a big improvement on the 200bopd you have today. Is that realistic?”
CH: ” It is absolutely realistic. I’ve been working in this region of Western Siberia for 14 years……at Imperial Energy over a 3 and a half year period we ramped up production from a couple of hundred bopd to 20,000bopd….done it before, got the right people…all of our Senior management team in Russia are ex-Imperial Energy. We know how to do it and are looking forward to it”
I find this hugely encouraging – if it was Range and Walter I’d say jamorrow but believe Hopkinson’s credentials and plans a whole lot more
4. A more balanced investor base. One of Range’s problems in its ownership has been the lack of institutional investors. IOP has a very different investor base with II’s such as Blackrock, M&G, Henderson Global Investors, JP Morgan, Eton Park Capital management investing. I hope this will add stability, balance and credibility. I feel that we lack credibility because of Pete not being an oil person – more a wheeler-dealer. II’s will look at the new board and be more encouraged (as should PIs).
5. Frank Timis (bear with me here). I know people will call him a crook and it seems that he has had to pledge to no operational input and to reduce his holding from 14%to10%:
“Mr Timis’s shareholding in Range at the time of completion of the proposed merger transaction will be below 10% through a sell down or other arrangement”.
The wording here is very interesting: “at the time of completion”. I am not sure that AIM or ASX will be able to put on-going constraints on Timis’s holdings after jumping through the 10% hoop on completion (happy to be corrected by someone more in the know). Look back to my “What Timis Gets” post of a week ago - I have always thought that this merger is a mechanism for Timis to get an LSE listing by the back door. Timis is a proud man and this is now his flagship oil investment – If he is not constrained I can’t believe that he will not have a medium term plan to increase his holding – that will be great news for us holders. This is the twist I mentioned earlier – RRL may be effectively taking over IOP but Timis will still be the single biggest shareholder and will want to exert influence – and in my opinion increasingly so through growing that stake. I also believe that his contacts and personal wealth will be great assets. Its business – we don’t have to like the guy – other than Regal he has a good track record of making himself and investors’ money.
6. A seasonality of exploration focus in Russia will mean that during the late spring/summer/early autumn, Chris Hopkinson and team will not be able to be engaged full-time on Siberia so focus will shift to Trinidad which definitely needs intensive overhaul from someone who operationally knows his stuff – and Chris and team’s experience and know-how are very strong
CONCLUSION
Is this what I would have wanted as the Corporate Development for Range?
Probably not – I would have preferred Range just focusing on Trin and Colo with Proceeds from Texas and RBL
Am I open-minded to the upside on the deal?
Yes because I still don’t know, because of the news embargo, exactly what we have bought. If the winter programme in Russia has gone well and I can see clear line-of-sight to the Dec ember 2013 4,000bopd Chris Hopkinson is so confident about the take-out price will seem very good business.
I am also extremely encouraged by the operational management expertise brought by IOP because Range are frankly piss-poor here and I think our credibility and undervalued SP reflect this
How do I feel about the placing?
Not brilliant because of the history with this company, however I am encouraged because:
• at 5.3% it is actually quite modest considering the scale of the deal. • It was at a small premium to pre-suspension SP • it was Institutional Investors rather than “Sophisticated Private Investors” who took up the placing – more credibility, they will know the inside prospects we don’t know and will want to make a good return
Whether it is good business will depend on what the Russian test results show – i.e. what have we bought?
Is this a good time to sell?
Not for me – Range was way undervalued in my book before the IOP tie-up and that remains the same.
I sense, as per some comments by Kev Yorks on Worldstocks that this is not a standalone deal but another enabler in a longer plan and that a Puntland tie-up with a bigger playerwill be one of the next pieces in the jigsaw once this deal is completed.
There is a lot of news to come from both sides and I will wait for it before making any rash investment decisions.
As stated above a lot for me will depend on the coming operational news from IOP – this will be the lifting of the bonnet and we’ll be able to see if we’ve bought a turbo charged injection engine or a lawnmower.
Pete of course will have known most if not all of this when he made the deal – and he had good leverage at the negotiating table so we have to presume he used it – he did not have to do this deal – IOP did – so God I hope he has nailed this one.
The saga continues - Waiting patiently here and will post my first “Hold” recommendation on Range because until we know operationally what we’ve bought it is difficult to pass judgement
I would advise other long-term holders to wait as well – does not feel the right time to jump ship
All the best
SOTO
RRS Price at posting:
5.8¢ Sentiment: Buy Disclosure: Held
