the book value of the biofuel project is zero, page-23

I assume from the subject heading CK is suggesting the spin-off has zero value...

Ask him to take a look at GPN's balance sheet around the time of their spin-off...and then get him to report back to us.

Here we saw an asset strip in the form of a return of capital and an adjustment of par on both the heads and options...and this was in spite of a nuetral pro-forma result.



In this case, the asset did not show up specifically with a book value in the finacials...yet in the end, GPN assigned a book value of some $1.6m due to the IPO valuation model.

this is exactly the same as what JPR are doing!

Back to GPN...in spite of an apparent asset shift of some 16% or so, in the end, the par value of the FPO's and options was adjusted by some 29%, which saw the GPNO excercise price move down from 3c to just 2.13c

Interestingly, this occurred in spite of there actually being a neutral asset movement according to the pro-forma, due to the allocation to the company of shares in the new IPO, above and beynd those issued in-specie to shareholders!

In this particular case, one may have argued that an adjusted options price was not necessary?

In light of this, perhaps the following passage from the ASX guidlines might help explain...it applies to all company derivatives, including ETO's, Warrants and company issued options...

"Corporate Actions
Corporate actions can also affect the value of listed derivatives over the security subject of the corporate action. It is the philosophy of ASX (and all other exchanges globally) that as long as the corporate action affects all shareholders pro-rata, then option holders are compensated pro-rata by an adjustment to the value of the derivative.

Guidelines for ETO adjustments are set out in the ASX Market Rules on our website, see http://www.asx.com.au/investor/options/notices/adjustments/2006.htm

Warrant adjustments are generally similar to ETO adjustments, however they are detailed in the terms of issue for each warrant.

Derivative adjustments can only be made for corporate actions that are pro-rata to all holders of the underlying security. As derivative holders may also be shareholders of the same company, listed companies are encouraged to consider the potential impact on derivatives of a proposed corporate action. Companies should also give consideration to how dividends to shareholders are labelled, as this may have significant implications for holders of derivatives. For example, where a ‘special dividend’ is paid pro rata to shareholders, an adjustment will be made to the terms of options over the stock. If the same amount was paid as part of the ‘ordinary dividend’, no adjustment would result. While the amount received by shareholders might be the same regardless of the form the dividend takes, the consequences for derivatives traders could be substantially different."

Now...given all the above, it is clear JPR's capital return in the form of an in-specie to the IPO would well and trully fit into the defined category by the ASX, further, as the in-specie effects all shareholders equally, that an adjustment to par value in the options would seem appropriate.

How this value is worked out may be less straight forward however?

The asset value according to the IPO is $40m...clearly a major adjustment item given this is currently more than their current market cap? Using this figure and applying it back to a fairly straight forward asset adjustment, I get a new options strike price as low as 2.4c...I have been using 5c however as a possible likely number to be conservative.

If on the other hand the company uses book value for the par adjustment, then we have no idea of what this adjustment might end up being, because we do not know what percentage of the company's assets have been applied to the Biofuels item?

This may potentially result in a lower adjustement percentage, but given the low value of their other assets, it should still be proportionally significant?

Finally, the company may well be between a rock and a hard place here in my opinion? Clearly they want to see a successful outcome for the IPO...on this basis however, I am not sure how well received a significantly reduced "book value" might be by the IPO recipients?

Might be best just to book the asset at the "realised value", reduce the par value on the heads and options accordingly and get on with it?

What vever the final approach here. clearly the adjusted par value would need to make some reference to the added value for shareholders via the in-specie..and by extension, the removal of this value on the ex date?

At the moment, each share carry's an inherent IPO value of between 26.5 - 31c...depending on the final ratio applied...this is above and beyond the remaining value of the compnay, which as we know, is likely to see an energy asset backed in.

It seems fairly obvious therefore that a pre record date price of say 40c should result in about a 28c adjustment on the ex day...this equates to a 70% adjustment.

Applying this to the above 40c gives us an adjusted head price of 12c and an adjusted options strike price of 6c...which sounds about right to me!

Could the calculations be as simple as this?

Anyway, I have been assured all issues possibly effecting the options will be explained in full in a letter to be sent out to all options holders once details have been clarified.

Cheers!