KNOC | DANA Takeover Bid - KNOC Makes Preliminary Approach. | Hannibal

1st Jul '10 by hannibal

847 comments 208997 reads

Hot off the press:

http://www.ft.com/cms/s/0/2bee2044-852f-11df-9c2f-00144feabdc0.html
http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=3551412
http://online.wsj.com/article/BT-CO-20100701-710080.html

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Hannibal

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847 comments

AnonymousUser858

8th Sep '10

Hi SirL

I'm struggling to understand why you are taking such a hostile/critical/judgemental line towards T Cross. What is clear is that he is not acting out of simple self interest. If he were then as you yourself have said several times, he would have used his position to obtain a loan note alternative out of KNOC and thereby saved himself a fortune in CGT. But he hasn't done that. You might consider him foolish for passing up that oportunity but to other people including me his refusal to act out of self interest is a) admirable b) honest & ethical c) typical of his straight forward style.

Why do you want to punish him for doing what he and the other directors think is in the best interests of shareholders?

Surely if you beleive your own argument then you should sell now at £18 and leave the playing field. The fact that you are not doing so but are instead still holding on must indicate that you believe there is some chance of a better outcome than a sale at £18. Either an increased offer from KNOC, or a better offer from someone else. Or as an alternative a major discovery which boosts the visible value of the company beyond the range of bidders - resulting in the bidders retiring unsatisfied and the SP staying high.

What doesn't make sense to me is that you are hanging on for a better outcome than the one available today, whilst strongly criticising the man responsible for achieving a better outcome.

Why don't you just sell and have done? What outcome are you hoping for?

thegreatgeraldo

8th Sep '10

Spent some time this afternoon trying to make some sense of the KNOC offer.

AIUI, they're looking for 90% acceptances by Sept 23rd, but will presumably claim 51% as a victory? In the unlikely event (?) that they don't reach 50%, the bid lapses. If they get over 50%, the offer is extended for another month, where they aim to reach 75%, either by further acceptances or purchases in the market. At 75% they can apply to de-list Dana shares, or ideally, from their POV, reach 90% when they can compulsorily purchase outstanding shares.

If, in the next 2 weeks, no counter-bid or AM affect (whether an announcement or speculation over same) turns up, the price is likely to drift to the offer price, where KNOC would be free to buy in the market.

That's my broad understanding of the situation, happy to be corrected.

AnonymousUser858

8th Sep '10

SirL and others have previously discussed the valuation of Dana and have amongst other things criticised what they have seen as a lack of detail in previous disclosures on reserves and prospect sizes.

Well all the data is now out there. hundreds of pages of the stuff.

And Dana's own valuation is set out for all to see.

So now the critics can see the data, what do they make of it? Do you have any criticisms? Are there any errors or omissions? Are any of the calculations over-optimistic?

And based on the data as published, what do your own valuation models tell you?

For my part I'm happy to go along with Dana's valuation - but as always I'm looking at the long term and thinking what shape the company will be in in 5 years or 10 years if it stays independent. 10 years ago it was producing 5k boepd. By year end it will be 70k. What will it be in 5-10 years? 250k?

Likewise wrt reserves.

But for me one of the biggest issues is the proposition that exploration can and will generate value. It seems ludicrous to me that analysts attribute only £1 per share for the value of the entire exploration portfolio. It reflects a degree of pessimism that strikes me as at odds with empirical experience across the industry. I look forward to a return to Mauritania and to an exploration prgramme in Guinea. I just don't see that such prospects are worth diddly squat.

sirlurkalot

8th Sep '10

ee,

Since it appears TC has believed Dana was worth "between 2270 - 2465 pence per share with major additional upside", why on earth hasn't he been out communicating that for ages whilst the SP languished much much lower? (or why was he so unsuccessful with the IR that he did do?) This bid was launched when the shares were (?)£11.50!

Since it appears annual reserves remaining figures for each field are independently checked annually, why wasn't that key information disclosed? [particularly since TC seems to have a finely-calibrated sense of the significance of undisclosed information in the matter of declaring KNOC to be insiders re the earth-shattering Suncor deal]

Has TC been disclosing all price-sensitive info promptly to the market over the last few years? Can he possibly have been doing so if his info suggests the shares are worth 2270-2465 at a time the mkt thought they were worth 1150 or so? The mkt reaction to today's news suggests the mkt has little confidence in him.

On a technical matter, when you write "there is also a decent chance that sometime earlyish next week AM will hit TD", by TD do you mean the lowest of the ~six horizons or the highest? Will there be progressive RNSs of drilling results as each of the ~six are reached?

If your upside hopes now are essentially an Anne Marie play, wouldn't Faroe itself be a better way to play that? Supposing you are right in your hopes AM is a big success, wouldn't that be much more material to Faroe than an extra pound or two on the bid for Dana? [Does anyone have any research suggesting how much the more optimistic AM outcomes would mean per share for Faroe?]

"there is also a decent chance that sometime earlyish next week AM will hit TD"
IMO investors may give Dana and the hopes for a white knight the 11th-12th weekend to get the w k sorted out, and if there's no w k news first up on Monday 13th investors will give up hopes and start selling, pushing the shares below £18 and into the area where KNOC can start hoovering up. Once KNOC's powerful hoovers are working at full speed I doubt this will last much longer.

emptyend

8th Sep '10

That is a continuation of your previous rants that you had claimed to have forsworn. I am as mystfied as tournesolf is that you are still holding.

On a technical matter, when you write "there is also a decent chance that sometime earlyish next week AM will hit TD", by TD do you mean the lowest of the ~six horizons or the highest? Will there be progressive RNSs of drilling results as each of the ~six are reached?

TD is TD....as usual! Whether it is reached next week depends on whether the well is as expected, or whether they have decided to drill deeper (or been delayed).

If your upside hopes now are essentially an Anne Marie play, wouldn't Faroe itself be a better way to play that?

Not necessarily, especially post-tax.

sirlurkalot

8th Sep '10

I'm struggling to understand why you are taking such a hostile/critical/judgemental line towards T Cross ......Why do you want to punish him

I've had issues in the past on the impossibility of valuing the shares given the lack of reserves disclosure. Now, unless a white knight appears, I believe he is simply misjudging the value of his hand. IMO the only reason this isn't already over is his obstruction re making KNOC insiders. I didn't suggest he was acting mainly in self interest, but it is odd that he hasn't negotiated a loan note that might suit lots of people, including himself. Others here have criticised his management approach as empire creation rather than acting completely in shareholder's best interest.

Surely if you beleive your own argument then you should sell now at £18 and leave the playing field. ....Why don't you just sell and have done?

As I've clearly written, I'm about to. In the meantime there's no harm done hanging around sitting on a free option in case there is an upside.

The fact that you are not doing so but are instead still holding on must indicate that you believe there is some chance of a better outcome than a sale at £18

Yes, as I've written I've consistently thought there was some minority chance of more than £18, and that's what I've held on for. Holding until today was arguably worthwhile, but I agree with your suggestion that the rationale for continuing to hold now this defence doc has had little impact is reducing. I've been busy today, but may well sell imminently. If there are no developments, I will certainly have sold by 23 Sept, but there's been no harm done hanging around this far on the off chance of more.

What doesn't make sense to me is that you are hanging on for a better outcome than the one available today, whilst strongly criticising the man responsible for achieving a better outcome.

I'm an arb. I bought when the first talk of a bid appeared. There's no inconsistency in trying to get the highest outcome whilst suggesting that the imminent loss of independence is due to weak IR in the past and mishandling of negotiations in the last couple of months.

emptyend

8th Sep '10

There's no inconsistency in trying to get the highest outcome whilst suggesting that the imminent loss of independence is due to weak IR in the past and mishandling of negotiations in the last couple of months.

Except of course that there are no grounds for thinking that negotiations have been mishandled - particularly as the process has yet to reach a conclusion!

And, furthermore, I am not convinced (based on firsthand discussions over the last 9 months) that the imminent "loss of independence" isn't partly a matter of conscious choice. The possibility of a successful bid has most certainly been actively contemplated since late last year (as I reported in several previous posts).

sirlurkalot

8th Sep '10

Except of course that there are no grounds for thinking that negotiations have been mishandled

If he produces a white knight, he's handled things very well and I'll admit I underestimated the chance of that. I write this below assuming that is not the case.

Negotiations are all about assessing the value of your own hand and getting the best possible deal from the other party. A loan note is a clear example of something that would have been nice for many shareholders that can be of little extra cost and which doesn't look like it will be achieved from KNOC, so in that sense he hasn't got the best deal possible. More than that, though, I sense there's a clear difference in opinion of the value of the hand he holds between TC and his shareholders, as exemplified by the someones going to get egg on their face issue, and so, in that he hasn't judged things quite right, to describe negotiations as being mishandled seems fair enough. His shareholders are clearly not supporting his view of the situation, as evidenced by the 48% support and the no SP movement today. The making KNOC insiders just appears a clumsy delay that's annoying but will probably make little difference in the end - the extra time gained for the defence doc doesn't seem to have made much difference. The only circs in which it could be argued that he has genuinely negotiated well are the Telegraph's view the other day that actually Dana is worth a fair bit less than £18 and he's done well to get that much, but I doubt you agree those circs are the correct ones. Supposing the £18 succeeds, and so someone who lives in Aberdeen gets egg on their face, would you then agree that negotiations have been mishandled?

By "TD" which might be reached earlyish next week are you referring to the depth of the highest or the lowest horizon please? Relevance being, of course, that if they are at the lowest horizon earlyish next week, then they've probably been through the highest horizon or two by now.....

thegreatgeraldo

8th Sep '10

His shareholders are clearly not supporting his view of the situation, as evidenced by the 48% support

Except those with CFDs who have borrowed shares from shareholders who may well not support the bid.

TD is Totall (ie Target) Depth... Bottom!!!

emptyend

8th Sep '10

By "TD" are you referring to the depth of the highest or the lowest horizon please?

T stands for Terminal. So it is surely obvious!

If he produces a white knight, he's handled things very well and I'll admit I underestimated the chance of that. I write this below assuming that is not the case.

I prefer to wait and see what the fat lady has to sing, rather to assume I know what it will be from the way that she gargles!

If, of course, Cross is unable to get any increase over £18 then I will (with disappointment) accept that I was wrong to think that he could (though at least I was right in my original expectation of a starting offer in the £18-20 range rather than the £16.50 touted by the FT).

I am still optimistic that a better deal can be done, even though 99% of commentators appear to think otherwise. One of the reasons for this is that KNOC have "left a lot of room" by sticking at £18.....you don't have to believe everything in the Dana defence document to consider that there is some value in a higher bid.

peterg

8th Sep '10

Supposing the £18 succeeds, and so someone who lives in Aberdeen gets egg on their face, would you then agree that negotiations have been mishandled?

I don't think that follows. KNOC's initial offer was £17. It''s now £18. It's quite possible that will end up being what they pay, though it may not be. However, does that make an attempt by management to improve on that, even if not successful, a mistake? At present pushing for a higher offer hasn't cost anything (any defence costs will be born by KNOC if they succeed at £18). It may end up costing TC some CGT if no loan note appears, but I'm not going to start criticising him for taking that risk to attempt to increase the offer to all shareholders.

nigelpm

8th Sep '10

Spot on Peter.

I actually think both sides have played this well so far and it's still wide open on the outcome.

I also bought some more today as in agreement with tournesol that downside is minimal and yet upside could be much more than "a few pennies" as quoted by a certain respected poster on TMF.

sirlurkalot

8th Sep '10

Sorry, I thought TD meant Target Depth, in which you might have several TDs as you go down.

But since it means Terminal or Total Depth, ie the lowest they will possibly drill, does that mean they've already drilled through a few of the six horizons by now, and TC is sitting on some knowledge of what they have found?

Contrary to what some people here seem to think, I believe there is some non-zero chance of more than £18 being achieved - that's why I'm still holding now. I am genuinely interested in analysis of how likely more than £18 is to happen. If £18 were to be accepted without anything much more happening, TC would look so out of touch and have so much egg on his face that I'm still struggling quite to believe that is the case. He can't be that bad can he? His behaviour still doesn't quite add up - how can he be playing it the way he is unless he has a (reliable non-Anne Marie) ace up his sleeve? Why did he refuse to negotiate unless KNOC signed an agreement not to go hostile?

thegreatgeraldo

8th Sep '10

If £18 were to be accepted without anything much more happening, TC would look so out of touch that I'm still struggling quite to believe that is the case.

They've been drillling at AM for nearly 6 weeks, barring unexpected delays, they can't be too far from TD. Therefore there still seems a reasonable chance that success at AM will influence the price Dana is eventually sold for. Without TC snagging them with Suncor , the deal could well be done & dusted by now, imvh. KNOC should perhaps evaluate the advice they've presumably been paying through the nose for ;-#)))

AnonymousUser858

9th Sep '10

SirL

Why did he refuse to negotiate unless KNOC signed an agreement not to go hostile?

I don't think you've quite understood the facts here.

He didn't refuse to negotiate - where on earth did you get that idea from?

He and the Chairman - Colin Goodall - did agree to negotiate. To that end they invited KNOC to Aberdeen. KNOC declined the invitation. So Cross and Goodall flew to Calgary where KNOC management were doing some unrelated meetings with other companies. In Calgary Cross & Goodall invited KNOC to conduct due diligence. They did lay down 2 pre-conditions.

1) that KNOC sign a non-disclosure/confidentiality agreement

2) that KNOC should not finalise their decision on offer price in advance of seeing the confidential material which would be disclosed within the due diligence process.

Of these pre-conditions 1 is absolutely standard business practice. You would not let anyone go through your books and your operational and technical data without them first signing a NDA. As a consultant working in many oil companies I can tell you that every single one of my clients insisted that I sign NDA's before getting my hands on any data/financials. What possible argument could there be against this?

pre-condition #2 is equally reasonable. If KNOC decided a price which was set in concrete before they even started discussions and which they said was unchangeable regardless of any info they learned subsequently - then what exactly would any negotiation be about? By definition that would not be negotiation.

AIUI in Calgary KNOC DID AGREE with the 2 pre-conditions. Cross and Goodall thought they had the beginnings of a deal. It was in that circumstance that they shared with the Koreans the fact that they were at an advanced stage of negotiation to buy the second package of Suncor assets. It wasn't done as part of a machiavellian scheme. It was something to whet the Koreans appetite and to loosen them up for some serious haggling over price.

Cross & Goodall came home feeling not unhappy with the situation. They thought the £18 had been a ranging shot. They had no doubt it was much too low. But they were confident that once KNOC went through the books and the detailed data, they would readily accept that the bid should be raised.

Then came a surprise. The people back in Korea rejected the agreement that had been reached in Calgary.

They said that

1) the offer price was final and non-negotiable

2) the due diligence was not going to be about assessing value as a precursor to negotiating an agreed bid - it was simply part of the completion of a deal at the price previously decided by KNOC

3) KNOC was not prepared to sign an NDA before doing the DD

4) KNOC insisted that Dana management should agree the offer at the price decided by KNOC and publically recommend the deal BEFORE due diligence was undertaken.

In other words Dana should do as it was told without question, without discussion and without arguing over the price that KNOC in its wisdom has decided to pay/

It was outrageous that the previous agreement had been scrapped without consultation. And the new demands were themselves outrageous and unacceptable.

Cross and Goodall swallowed hard and instead of telling the Koreans to sling their hook repeated their invitation for KNOC people to come to Aberdeen. The invitation was ignored. Gritting their teeth and adopting rather fixed smiles, C&G then offered to fly to Korea to meet KNOC on its home turf to resolve the situation. They thought there was a misunderstanding that could be cleared up.

KNOC declined.

Now I don't know about you, but from where I'm standing, I'd say that Cross & Goodall behaved with absolute propriety and in the utmost good faith right through this pantomime.

In contrast KNOC behaved capriciously and unreasonably.

An unsolicited bidder who refuses to discuss price, who wants unconditional management acceptance as a pre-condition to serious discussion, who refuses to meet you, who refuses to let you come to him, who makes you travel to Canada to meet someone with no real authority and then repudiates what has been agreed.

This is not normal behaviour by serious, competent, professional business people. maybe this is how things work in a Korean State owned enterprise, but it isn't how you do things in the real world of business.

If this is how KNOC goes about trying to make acquisitions, it is not surprising that it has such a poor track record of doing deals.

So taking account of the above, tell me again why you are determined to blame Cross for the impasse that has developed. Surely it is KNOC who have been inept, incompetent, arrogant and unprofessional. Certainly looks that way to me.

And I can;t imagine for a second that if KNOC does succeed in its smash and grab raid, that Dana staff will want to stay and work in the kind of environment that one would expect to find in an organisation where management behave like this.

AnonymousUser858

9th Sep '10

I remain bemused by the negative feelings towards Cross. He founded this company. He built it from scratch. He has spent 20 years - the core of his career and the centre of his entire life - on developing the company. In that time he has taken it from a start up to a company worth more than a billion and producing 40k bopd today - 70k by year-end.

He extricated it from Russia when that country imploded under mafia control and kept it afloat when it could easily have sunk without trace fom the collateral damage sustained at that time. He boot-strapped exposure to licences in Indonesia and when they came good horse traded them into the seed-corn of the N sea assets portfolio. He has slogged around Australia and much of Africa. He has done deal after deal after deal.

And under his watch the shares I originally bought for £1 each around 1999(ish) have turned in a pretty decent perfomance.

And for 10 years he has been unfailingly helpful and polite to me and many other small scale shareholders. My e-mails and requests for clarification/information have been answered quickly and fully. I've lost count of the times I've spoken with Cross in person. Not wanting to waste his time, I've typically e-mailed my questions and its he who has then made the call. On occasion he's called when I've been out and has even taken the trouble to call me on my mobile.

Now I have to tell you I like the guy. I like him a lot. And I think he is really very good at his job. And I know what good looks like in this industry. And I think he always always goes the extra mile.

And he has made me rather a lot of money. For most of the past 12 years I've been very overweight in Dana. For quite a lot of that time I've had anything up to 60% of my portfolio in this one stock. (let's not talk about risk and diversification - that's a subject for a different thread).

As far as I'm concerned Mr Cross has built up a very large credibility balance and a lot of goodwill. What I see here is somebody determined to block a predatory, opportunistic, low ball bid timed to take advantage of the volatility which is normal in this sector just before an intense drilling programme containing many opportunities for the generation of substantial value added. AFAIAC he deserves credit for that not criticism. The outcome I'm hoping for (and I do realise this is unlikely now, but I can still hope) is that the bid fails and Dana remains independent. If that happens, I've absolute confidence that Cross will achieve as much in the next decade as he has in the last.

T

emptyend

9th Sep '10

Well that has solved the potential issue of any loss of face for either side re a recommendation - KNOC are now only prepared to increase their offer in the event of a counterbid.......and aren't even going to bother looking for a board recommendation......

....probably because they know they won't get one without paying up materially.

http://www.investegate.co.uk/Article.aspx?id=201009090703114048S

I would have thought the same point would stop them paying up too far in the event of a counter - which means that any bidder who fancies it probably knows they have a clear run......though they'd probably need to move fairly fast to declare their interest and keep the shares above £18.

EdmondJ

9th Sep '10

One possibility surrounding today's announcement is it partly being done to knock the price enough to allow Merrill to buy on KNOC's behalf, this being a recent frustration.

Another, which is logically implicit in KNOC's willingness to increase its offer in the event of a competitive situation, is that it DOES see strategic value as higher than £18 a share.

KNOC's stated intention quite contradicts its words!

MrTrousers

9th Sep '10

Now that the SP is below 1800 should we not be seeing massive volumes due to KNOC buying and a consequent drift back up to the 1800 cut off?

MT

EdmondJ

9th Sep '10

Unlikely as KNOC will not want to whack it straight back/above £18 when there could well be a steady exit of holders seeing opportunities elsewhere (if no higher offer) until the 23rd.

DANA takeover bid - KNOC makes preliminary approach.

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Hannibal

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