Basket case, page-11

Just trying to catch up on the debacle across at MEO. MEO has just been involved in a disastrous merger of equals with NEN. You will remember MEO as the other Oil & Gas explorer that shared Board Members with MEL. Nick Heath was Chairman across at MEO and Chairman here at MEL and Greg Short was a Director at MEO before we invited him to become a Director across here at MEL because of his supposed expertise in identifying exploration activities outside of the Northern Rivers. Greg became Chairman at MEO after Nick retired and is still Chairman across there. All good ex Esso boys.

At the time of the proposed merger MEO and NEN, while slightly larger than MEL and ELK, were not substantially different. MEO had cash on hand of $11.8 million and a market cap of $29.2 million while NEN had cash on hand of $19.6 million and a market cap of $17.7million.


Immediate points of interest were: -

• MEO, the target, spent $762K prior to completing the Scheme. If the scheme had gone through, MEO were also obliged to pay a minimum of $1.25 million to their financial advisors. In addition there was a further incentive fee of up to $750,000 payable to those same advisors. So it would cost the target between $2.01 million and $2.76 million to complete the scheme. In our case these costs would accrue to ELK but would end up being be deducted from the merger cash reserves of the merged entity.
• Greg Short (remember he was supposed to help MEL in the pursuit of opportunities outside NSW) had six weeks holiday in Italy from 3 November 2014 through to 14 December 2014. The MIA with ELK was signed on 21 December (announced 22 December). So, in Greg's absence, just who was the brains trust analysing the proposed merger - our Chairman Len Gill with his extensive experience in electricity generation in Australia, our MD Henderson who was bought in to bring our projects together or Peter Berry with finance and merger experience from Melbourne? Just who was looking at the technical challenges of EOR in the US - because none of the available Board Members have the slightest experience either in EOR or operating a junior in the US. So it looks like the only time Greg might have made a useful contribution to MEL he was off sipping Sangiovese in Italy - so a total dead loss since he was appointed in August 2013.
• Gilbert and Tobin, who are MEL's legal advisor in the proposed MEL/ELK merger, happened to be MEO's legal advisor and earned close to $425K even though the MEO/NEN merger failed. Good work if you can get it.

The sorry recent history of MEO goes something like this (MEO has a long sorry history but the recent events almost take the cake): -

• 10 September 2014 NEN receives an off market proportional offer from Evoworld for 30% of shares not already held at $0.035 per share (On 5 September 2014 Evoworld held 11.38% of NEN)
• 15 October 2014 Evoworld issues Bidder's Statement for NEN share purchase
• 5 November 2014 NEN and MEO announce Merger of Equals by way of MEO Scheme of Arrangement
• 13 November 2014 Evoworld issues Notice under Sections 203D and 249F of Corporations Act that it intends to seek an General Meeting of MEO for removal of directors
• 2 December 2014 MEO lodges Scheme Booklet
• 11 December 2014 Mosman Oil and Gas, listed on the AIM, lodges an off market take over for 100% of MEO
• 19 December 2014 MEO sends Scheme Booklet and Independent Experts Report to shareholders
• 22 December 2014 NEN receives a revised off market proportional offer from Evoworld for 50% of shares not already held at $0.038 per share
• 22 December 2014 NEN terminates proposed Merger of Equals with MEO

One point worth noting is that Greg Short, the MEO Chairman, was missing in action during most of this period.

Well how did the companies come out of this debacle.

NEN shareholders seem to have come out in front. The NEN share price going into the deal was $0.032 and they managed to dispose 50% of their holdings for $0.038 with the remainder of their holding closing at $0.033 and for NEN their only major expenditure seems to be payment of the Break Fee of $400K.

For MEO it has been a disaster, MEO spent $762K preparing for the merger and only received $400K reimbursement from the Break Fee. Plus the MEO share price fell from $0.039 prior to the merger to less than half at $0.019 now.

The relevance to MEL: -

• These types of deals are fraught with difficulties
• There is a significant cost to completing the deals - minimum $2 million which neither MEL nor ELK have
• While one of our Directors, Greg Short, could be expected to recognise the pitfalls, he was absent during the most relevant periods

Let's hope our Directors have taken notice of this debacle and know how to avoid them. But it looks like the Director who might be aware of the problems, Greg Short, was absent when the deal was made, so that might be wishful thinking.