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

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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

emptyend

14th Aug '10

The Dana situation stands out from the bunch of regular FM bid reactions as one in which they seem ready and quick to exit early. Why is Dana different from most institutional bid reactions?

Simple.

In this case, at £18, the institutions would be booking a swift mark-to-market profit of 60%. The "average" bid situation produces a mark-to-market profit of 30-40%.......therefore, so the institutions "reason" (hah hah!), the £18 MUST be a good deal because KNOC are potentially paying a bigger premium than is standard for deals in other sectors.

The fact that Dana was trading cheaply prior to the bid was very well-recognised in the market - even amongst the analysts. The "big" premium arises because the shares were underpriced prior to the bid. The fact that institutions appear only to recognise this AFTER a bid has been tabled is perhaps the oddity that you should be pondering? The answer is simple - they don't understand the business sector (indeed I recall you yourself saying as much when you started to get involved in it!).

As then much the biggest holder, presumably Dana focused their presentational effort, persuasion and fact disclosure on Schroders. So how is it the AGM attenders could be so much more convinced and bullish than that?

I've no doubt that Schroeders DID get plenty of attention. And I don't think there is any basis for saying that AGM attendees are "much more convinced and bullish"........the difference between the £18 already tabled and the figure that I would think fair value pre-Anne Marie (c.£19.20-50) is about 7.5%..........which is not a great deal more than the deal fees that the advisers will earn from the deal and, in the context of buying a business that is likely to provide 20-50 years of fuel price security for KNOC is actually a bit of a rounding error!

emptyend

14th Aug '10

I just want to go back to a paragraph in Dana's RNS of Thursday, which has been niggling at me:

It is very clear to the Dana Board that KNOC is also unwilling to ascribe any value to Dana's ongoing business development programme, despite KNOC being aware of significant, well advanced, non-public and valuable activities in this area, which could materially increase Dana's oil production and reserves in the near term, and which Dana believes would be in line with KNOC's publicly stated strategy of acquiring reserves and production.

Now....what might this refer to? Well-advanced, non-public and valuable?

And then there is KNOC's riposte:

In relation to the Company's "ongoing business development programme" and Dana's statement that KNOC is "aware of significant, well advanced, non-public and valuable activities in this area, which could materially increase Dana's oil production and reserves in the near term", KNOC notes the acquisition track-record of Dana, including its success in a widely marketed auction for the acquisition of Petro-Canada Netherlands B.V.. KNOC's Proposal assumes that Dana has paid, and will continue to pay, full and fair value for any assets acquired through such auction processes.

....so perhaps one of the main points at issue is Dana's (well-advanced) plans for a further deal - one of which KNOC are aware (via Merrill, presumably, who may be involved in some way in an asset auction)?

Going back to the exchange with davjo a few posts up, it is obvious that the tax positions of the buyers and sellers in deals has a big bearing on which parties emerge with a deal in an auction process. There is a big difference, for example, between buying assets at $15.66 per 2P barrel and buying them at $9.72!

Is this the sort of thing that Dana is referring to?

Is KNOC just looking at what, from the outside and without access to the books, just looks an "at-market" deal.....but which actually would bring Dana some big tax benefits that KNOC might possibly be aware of but is choosing not to recognise?

Perhaps we'll find out this week if they go hostile and the Dana defence document can cover that area (bearing in mind it is a non-public deal that hasn't yet been agreed)?

And perhaps this non-public information is actually the reason why KNOC timed the approach when they did - and why they are "very disappointed" that Dana hasn't just rolled over at £18?

We'll see....

kenobi

14th Aug '10

Very interesting EE,

Having just read the last 10 or so posts, the majority of which are yours, we've learnt how important tax benefits are,
and that DANA have 36M of costs in Egypt with nothing to recover them against.

Then also highlighted that they may have a dealing in the offing. but that knoc know about it and don't see it as valuable as they think dana will be paying market price, but ....

Even us thicky, thicky, thick, mc thickies at the back have added 2 and 2 together, and made, (well you decide for yourself what result we've come to ), that perhaps there is a deal in the offing that is much better value to DANA thank it appears to knoc, because either they have recoverable costs or a beneficial tax position, or scale in a particular area which makes it more profitable. Perhaps at the most simple there is some deal in egypt for 10's of Millions which will allow the recovery of the 36 M you suggest, thus making the deal almost free to dana ???

Have they told knoc about this ? probably, do they care ? well maybe they think they can get it for 1800 or a little above that and telling them this stuff just makes them keener, while not being keener to pay any more !

I guess we'll find out more this week,

I will be most amused if all my deductions are nonsense,

cheers K

fullbreakfast

14th Aug '10

It appears that Telegraph hacks will listen to Dana PR output as well:

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7945838/Rival-bidders-line-up-for-Dana-Petroleum.html

Anonymous "Canadian oil company" and "energy group from India" said to also be considering a bid. Talisman, Nexen and ONGC tentatively fingered.

Next week ought to be interesting.

davjo

15th Aug '10

Evening ee

Both figures are therefore "correct"....

Not in my book they ain't ;-) Numis clearly didn't read the RNS and should be ashamed of themselves in posting a false figure. Tax credits have the same monetary consideration as debt.

perhaps one of the main points at issue is Dana's (well-advanced) plans for a further deal - one of which KNOC are aware

Could well be, although I fail to see the relevance other than the potential to step up production for which a market price will be paid. It's of very marginal influence surely in the eyes of Shroder and the like, in that KNOC will be picking up the bill for such acquisition should a takeover of Dana go through.

Agree the possibilty that KNOC may have timed their approach to pre-empt some Dana new initiative but I suppose it depends on how lumpy it might be. I'm aware that Dana reorganised their bank facilities recently but haven't got a clue as to what sort of spare buying power in cash they have available to fund acquisitions. Any idea? I assume they wouldn't be looking at new banking facilities so soon?!

emptyend

15th Aug '10

Not in my book they ain't ;-) Numis clearly didn't read the RNS and should be ashamed of themselves in posting a false figure. Tax credits have the same monetary consideration as debt.

The point here is this: the value of any tax angle is largely dependent on the tax position of the acquiror. They are worthless unless they can be used. And since most RNSs on M&A don't estimate the tax impact, the only way to make "valid" or "apples and apples" comparisons is not to take them into account.......all such figures are very approximate anyway.

Could well be, although I fail to see the relevance other than the potential to step up production for which a market price will be paid......
Agree the possibilty that KNOC may have timed their approach to pre-empt some Dana new initiative but I suppose it depends on how lumpy it might be. I'm aware that Dana reorganised their bank facilities recently but haven't got a clue as to what sort of spare buying power in cash they have available to fund acquisitions. Any idea? I assume they wouldn't be looking at new banking facilities so soon?!

Perfectly possible that any deal may be paid for in shares (eg a merger) rather than cash......and, as noted above, KNOC comment about "market prices" being paid is pretty disingenuous - as the debate about the Bow Valley pricing illustrates (because $15.66 may have been viewed as an "expensive" market price from KNOC's standpoint).

There's no point in debating the minutiae of it at this point - chances are that there will be a Dana defence document out at some point which will give some clues re where the value lies.

sirlurkalot

15th Aug '10

"chances are that there will be a Dana defence document out at some point which will give some clues re where the value lies"

IMO with a dawn raid, the hedge funds' holdings and those of the big institutions KNOC may well be up close to 50% as they launch their hostile bid, making such a defence doc merely of historic interest. I think they can do it hostile at £18, the only remaining issue is whether they want to, ie do they want the operational management.

EdmondJ

15th Aug '10

Merrill Lynch's reputation is rather on the line here, having got its client into this situation, so you would think they will at least try and make a clean job of following this through.

MadDutch

15th Aug '10

With regards to The Telegraph artcle;
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7945838/Rival-bidders-line-up-for-Dana-Petroleum.html
This is the best possible news for Soco shareholders.
If KNOC can buy Dana for £18 a share, Soco’s chances of selling itself for a fair price will be greatly reduced. Desirable as TGD and Nganzi may be, we could have to wait more than 5 years before our assets can be developed and proven to the point where they can be sold. Therefore there must be a change in the mindset of buyers like KNOC and their supporters, no matter how painful it may be for them to be forced to pay a fair price.
The idea that a bunch of short termist city gamblers can allow a fine oil business like Dana to be sold for the value of its current proven assets, and without any value being given for the many man years invested in the exploration portfolio, is a ridiculous situation.
It establishes a precedent for the future sale of Soco which has more potential in its exploration portfolio, than in its current market capital.
MadDutch.

emptyend

15th Aug '10

IMO with a dawn raid, the hedge funds' holdings and those of the big institutions KNOC may well be up close to 50% as they launch their hostile bid, making such a defence doc merely of historic interest. I think they can do it hostile at £18, the only remaining issue is whether they want to, ie do they want the operational management.

Well obviously the extent of commitments will be key to this issue. I'd be surprised if they couldn't get over 30%, but I'd also be surprised if they were much over 40% - at least at this stage.

If the idea of other bidders has some basis in fact, it isn't beyond the bounds of possibility that there may be a contest.....and, if the hedgies and others were to believe that, then presumably they would withhold their commitment for now.

There is also some possibility (though very remote IMO, despite The Telegraph piece) that KNOC might not be the only buyer to throw their hat into the ring tomorrow........if, for example, a Talisman were to put £18.50 on the table tomorrow morning then that would spike the potential for KNOC to execute a dawn raid.

Best advice for KNOC, IMO, would be to pay up enough to get a recommendation today. Dana's board won't have decided not to recommend £18 on a whim....and they will clearly have ideas on how greater value can be demonstrated to the market. There is still a good chance that the big institutions who were vocal backers of KNOC at £17/£18 will end up with egg on their faces.......certainly there will be plenty of egg to go around - and it will either end up with egg on the faces of the institutions and analysts, or it will end up on the face of the Dana board (and a small amount on me....though I did originally say that the deal would be done between £18-20 when the FT was saying it would be £16.50 or so and have subsequently been thinking about a tighter £19.20 to £19.50 range).

One question though will be whether Merrill and KNOC will end up with egg on their faces....and we may not know that for a few days/weeks yet. Certainly it looks to me as if Merrill may have advised their client they could get away with bidding £18 - so they are perhaps the party at biggest risk of some embarrassment unless they can get close to the 50% very quickly.

nigelpm

15th Aug '10

This is the best possible news for Soco shareholders.
If KNOC can buy Dana for £18 a share, Soco’s chances of selling itself for a fair price will be greatly reduced. Desirable as TGD and Nganzi may be, we could have to wait more than 5 years before our assets can be developed and proven to the point where they can be sold. Therefore there must be a change in the mindset of buyers like KNOC and their supporters, no matter how painful it may be for them to be forced to pay a fair price.
The idea that a bunch of short termist city gamblers can allow a fine oil business like Dana to be sold for the value of its current proven assets, and without any value being given for the many man years invested in the exploration portfolio, is a ridiculous situation.
It establishes a precedent for the future sale of Soco which has more potential in its exploration portfolio, than in its current market capital.

I don't see this at all. If the bidders believe DNX is worth more than £18 then market forces will take the price there in an auction. If KNOC are the only show in town then it's likely DNX will go for £18 or thereabouts.

I don't see how this changes anything for Soco. I'd expect there to be many more bidders for Soco so that situation (an auctioning of assets) hasn't changed.

repobear

15th Aug '10

Hi MadDutch

There's not that much comparison with Soco, in my opinion, because Soco's mangement have enough stock to hold on for the price they want and the assets are more focussed, and certainly Vietnam will be largely proven up within 12-15 months, and hopefully not a lot less time;-) Africa is at a much earlier stage of the cycle and hopefully the hopes of management about the quality of the assets will take a long time to prove up.

What any sale of Dana will mean is that there is one less set of assets for the rising tide of state capitalism to mop up, instos will have sacks of cash to reinvest and Soco looks to be a likely home for some of that cash. The oil giants will be left on the sidelines if they don't get their arses in gear soon and start competing effectively for some of these assets and I think they'll up their game before too long and hopefully before Soco VN is sold.

I agree with ee that TC and colleagues did not take the decision to reject the KNOC approach lightly, but any counterbidders need to declare their hands pretty quickly.

One way or the other this looks likely to move in the next few days.

repobear

djpreston

15th Aug '10

Repo.

That point about the management (and friends) stake in the business is crucial. There's simply no chance of a deal without bringing onside those parties. Furthermore, the large holding limits liquidity so no chance of a dawn raid netting any significant amount of stock and less free float for arbs to play with.

D

sirlurkalot

15th Aug '10

MadDutch,

"allow a fine oil business like Dana to be sold for the value of its current proven assets"

Could you prove that £18/sh represents only the "value of its current proven assets" please? How do you know KNOC isn't attributing a lower $/bbl to the proven assets, and also attributing value to the explo?

If you are referring to the $/bbl apparently achieved in earlier M&A, remember that the $/bbl achieved earlier is calculated by starting off assuming all non-proven bbls are valueless and dividing proven bbls by total price thereby getting a slightly higher $/bbl. You can't demonstrate Dana's explo is treated as valueless by referring to earlier M&A $/bbls calculated on an assume-explo-is-valueless basis. You've got to compare apples with apples.

emptyend

15th Aug '10

If you are referring to the $/bbl apparently achieved in earlier M&A, remember that the $/bbl achieved earlier is calculated by starting off assuming all non-proven bbls are valueless and dividing proven bbls by total price thereby getting a slightly higher $/bbl. You can't demonstrate Dana's explo is treated as valueless by referring to earlier M&A $/bbls calculated on an assume-explo-is-valueless basis. You've got to compare apples with apples.

Just a comment on that:

...at £18 a share Dana's market cap is £1.666bn......around £1.96bn including net debt (most of which relates to the Dutch deal). This compares with a market cap for Premier of £1,772bn (at a 1522 share price)....around £2.02bn including net debt........ I'd suggest Dana is relatively inexpensive.

If KNOC pays £18 a share for Dana, they are getting 254mn boe of 2P reserves at $12.03 (using a $1.56 FX rate) including debt. At £20 a share they would be paying $13.17......

....compare this with other acquisitions. I'd suggest it isn't very expensive, especially when Dana's development and explo programme is rather more active than most....and at 80% oil vs 20% gas, the product mix is better than many (including Premier I suspect, since their latest results presentation makes no mention of gas/oil mix).

Dana has around 408mn bbls of 2P + contingent resources (plus finds made this year eg Fin/Lorcan etc)....and they also have some potential for significant near-term adds to that from Anne Marie and Cormoran.

My conclusion overall is that isn't very expensive, though I don't think there is much point in trying to go much further than that in analysis...

davjo

15th Aug '10

Dana has (now the Dutch deal is done) 254mn bbls of 2P reserves. This is virtually identical to Premier's reserves of 255mn boe.....and Dana's production (on 2009 numbers for the enlarged entity) is c 52,000boepd versus c 44,000boepd for Premier......

AIUI, Premier is ramping up production to 75,000 boepd from booked reserves, targeting 100,000 boepd subject to explo, so I'm not sure Dana can be seen as cheap relative to Premier. Indeed, one could possibly argue that Premier is a decent alternative target for KNOC on that basis. Probably explains their sp having shot up since KNOC revealed its hand!

Dana's development and explo programme is rather more active than most....and at 80% oil vs 20% gas, the product mix is better than many (including Premier I suspect

Ah but production from Dana's 2P booked reserves at 60:40 oil:gas is the only product mix that counts for anything in the current situation. Future stuff is burdened with lots of uncertainty!

MadDutch

16th Aug '10

Reprobear,
There's not that much comparison with Soco, in my opinion, because Soco's mangement have enough stock to hold on for the price they want and the assets are more focussed, and certainly Vietnam will be largely proven up within 12-15 months, and hopefully not a lot less time;-)

The management’s owning about half the business and wanting fair value for their exploration portfolio confronts the market’s unwillingness to pay for it. Unless something changes, and maybe the Dana news in The Telegraph will be that change, we will have to wait a long time for a sale of TGT and TGD. The former cannot be sold on its own. The oil in TGD is believed to be on 3 levels per a recent ee post, and we are currently drilling only one of them; I think it will be 5 years before the HTHP layer under the volcanics and the basement also is explored. There are 3 possible outcomes;
1. We wait for the lower levels on TGD to be explored, I think that could take 5 years.
2. Soco’s management accepts it will not get fair value for its explo portfolio.
3. The market accepts that Soco’s explo has a value that must be included in the sale price.

With regard to The Telegraph Dana news, outcome 3 is now more likely, IMHO.
MD.

emptyend

16th Aug '10

Dana's development and explo programme is rather more active than most....and at 80% oil vs 20% gas, the product mix is better than many (including Premier I suspect

Ah but production from Dana's 2P booked reserves at 60:40 oil:gas is the only product mix that counts for anything in the current situation. Future stuff is burdened with lots of uncertainty!

I don't follow the point you are making.

Dana's 2P reserves of 254mn boe include 124mn bbls of oil in Europe, with a further 30mn+ in Egypt. According to Cross's statement at the time of the Dutch deal, near-term production will have a 70/30 oil/gas mix.

Comparing Premier's reserves of 255mn boe, they have 46mn bbls of oil in Europe and Africa, with a further 35mn bbls of oil in Asia. The rest is gas.....and over 96% of the gas is in Asia, mostly in Indonesia and Pakistan.

If 2P reserves of oil are what counts, then Dana has 154mn bbls and Premier has only 81mn bbls.......and if one considers that the prime objective with their current interest is 2P oil assets in Europe and Africa then Dana has around 2.7 times as much oil there as Premier does.

emptyend

16th Aug '10

Just a thought on Korea's needs. From a press article I see that:

South Korea has a huge incentive. It has a population of 50m, no oil production of its own, but consumes 2.3m barrels a day, nearly 45% more than the UK with its population of 61.4m.

I wasn't aware that they consumed so much more oil than the UK per capita, though I knew they imported virtually all their oil (though not quite 100%, I believe).

Furthermore I see that Korean reunification is once again back on the political agenda of South Korea, as weekend press reports show:

President Lee Myung-bak in a speech on Sunday marking the 65th anniversary of Korea's liberation from Japanese rule proposed a three-staged method of reunification with North Korea and the introduction of a "unification tax" to prepare for the massive cost.

"Today, inter-Korean relations demand a new paradigm," Lee said. "The two of us need to overcome the current state of division and proceed with the goal of peaceful reunification." The comments mark a shift from policies aimed at maintaining stability to active steps toward reunification.

"We long for the common prosperity and peace of both the South and the North, which will lead to reunification, and this is the right way to achieve the genuine liberation of the nation," he said. He urged North Korea to face reality and make a choice for change.

Now, as we all know, North Korea doesn't produce any oil of its own either as yet (unfortunately! ;-))

That is potentially another 24mn oil consumers.

Can Korea unify without raising the oil consumption and aspirations of the North? I wouldn't think so.....which means that the need for South Korea to lock up production and reserves must, if anything, have grown more pressing over the weekend - if their political masters are going to be able to deliver a constructive reunification opportunity.

Interesting times.....

sirlurkalot

16th Aug '10

ee,

My point is that one cannot write that no value is being attributed by KNOC to the explo assets - perhaps KNOC are using a lower $/bbl for the proven bbls and also attributing value to explo.

Your reply in 402 is that, on whichever basis is chosen, £18 isn't very expensive. I agree that, but it isn't a direct reply to my point.

£18 may be low-rated, but in relation to where Dana shares have traded in the last few years and might trade independently if given a chance in the near future, it represents a generous price. Dana have always traded at a low rating. Why? Err... I've been hammering on about that in recent posts....

I agree with
"The [Soco] management’s owning about half the business and wanting fair value for their exploration portfolio confronts the market’s unwillingness to pay for it. Unless something changes, and maybe the Dana news in The Telegraph will be that change, we will have to wait a long time for a sale of TGT and TGD."
but IMO perhaps it may be a long time before an acquiror will adequately pay up for the explo in outcome 3.

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DANA takeover bid - KNOC makes preliminary approach.

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Hannibal

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