Arrow's target SO what game is Arrow Energy playing in yesterday...

Arrow's target

SO what game is Arrow Energy playing in yesterday declaring that it is continuing to assess its options in relation to its overbid offer for Pure Energy and its gratuitous investment advice to Pure shareholders not to "prematurely" accept the much higher, target board recommended, rival offer of BG Group?

It surely cannot be implying that one of those options is the possibility that it may yet top BG's offer.

Arrow has allowed BG's holding to jump from 10 per cent to 29 per cent by failing to overbid BG by Wednesday evening -- the deadline set by the independent directors and two major shareholders, Karl Meade and Tom Fontaine, to accept for their combined 20 per cent, in the absence of a superior offer.

To overbid BG now would only expose the Arrow board as inept. Arrow's failure to increase its bid before the Wednesday deadline suggests that it was unable to make the numbers stack up. Moreover, BG has already effectively stated that it won't accept an Arrow offer so Arrow cannot succeed. Speculation that Shell might help bankroll Arrow was off the mark.

It must therefore be assumed that the only options now under consideration are whether to accept the BG offer, hold out in the hope that it will lever a further increase by BG or, failing that, remain as a minority shareholder in Pure.

BG is offering $8 cash compared to Arrow's $3 cash plus 1.57 Arrow shares for each Pure share. Arrow's share price rose 12c yesterday to $2.69, following its disclosure that it is now sitting on more than $550 million in cash, after Shell's payment for a 300 per cent stake in Arrow's coal seam gas tenements, but even at that price its offer only values Pure shares at $7.22 -- 78c, or 9.75 per cent, below BG's offer price. Both bids are unconditional.

Arrow holds 20.2 per cent (following acceptances of 0.3 per cent) of Pure, while Shell holds 11 per cent. Arrow pointed out yesterday that since BG lifted its bid to $8, around 9 per cent of Pure had traded on the ASX at a weighted average price of $8.34.

That suggests that hedge funds have piled into Pure, punting that the auction will continue. If Arrow, Shell and the hedge funds all held out, that would account for 40 per cent of Pure's capital, which might be seen as putting pressure on BG to sweeten the pot.

But hedge funds aren't long-term holders. If BG were to rule out the possibility of an increase by declaring its bid price final, the hedge funds would have no option but to accept, and that alone would lift BG to around 40 per cent of Pure.

Shell's position is intriguing. When Arrow kicked off the bidding in December its initial cash and scrip offer valued Pure shares at $5.40 and Shell announced that its "present intention" was to accept, in the absence of a superior proposal.

That statement probably attracts ASIC's "truth in takeovers" policy, in that without a clear statement that Shell reserved the right to change its mind, then the use of the term "present intention" did not amount to a disclaimer. The UK panel treats "present intention" language as firm rather than qualified.

The test that ASIC applies is the overall impression that a statement conveys. It's strongly arguable that Shell led Pure shareholders to believe its stake was available for sale at $5 and higher.

The Pure directors have declared BG's offer to be superior to that of Arrow. It would be curious, to say the least, if Shell now wasn't prepared to take $8 cash.

That could raise questions as to whether Shell and Arrow are associates, which could have adverse implications for both parties.

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