Last Friday, the following appeared in The Australian - "BY...

Last Friday, the following appeared in The Australian -

"BY applying to the Takeovers Panel, Sydney Gas (SGL) is seeking to hoist Queensland Gas Co (QGC) with its own petard in relation to the conditions it imposed on its scrip takeover bid for Sydney Gas.

SGL has a chequered past and a recent history of board instability which came to a head in December when the entire board resigned after a group of shareholders moved to force board replacements, following the board's attempts to flush out the beneficial ownership of shares held by nominees.
The departing directors suspected that a group of shareholders, owning between 25 per cent and 35 per cent of the capital, were acting in concert to secretly control the company. Those directors themselves were a new broom and had come on board only a few months earlier because of concerns that under the previous administration some executives were receiving excessive remuneration and the company had run up high debt.

The departing directors were initially replaced by parties that the shareholder group had nominated. There have since been board additions, most notably the appointment this week of Ray Schoer, who was formerly the chief executive of the National Companies & Securities Commission, a predecessor to ASIC.
QGC's bid contains several conditions that seek to tie the hands of the target by preventing it from doing certain things without shareholder approval. In its bid document QGC says those conditions are "designed to ensure that SGL's inherent value is not undermined during the offer period through actions that might prevent SGL shareholders having the opportunity to determine the outcome of the offer".

SGL cannot make any material acquisitions or disposals, issue shares, options or convertible notes, give any encumbrance over assets, borrow money or appoint additional directors without shareholder approval.
Moreover, the company cannot enter into, or vary, service contracts with any director or executive, make any substantial change to their remuneration, or pay any new retirement benefit or allowance without shareholder approval. (In passing, it should be noted that Schoer's appointment breached a QGC bid condition because shareholder approval wasn't obtained. It should also be noted that Schoer has now acquired 200,000 shares in SGL for $76,000, or 38c a share.)

SGL's most pressing problem is the need to refinance $30 million of 12 per cent convertible notes which fall due for redemption soon - $10 million on April 1 and $20 million on June 1. SGL is exploring means of refinancing the notes; at present it has enough to make the first payment but not the second. Moreover, if the first payment is made it would be likely to breach another bid condition - that it holds a minimum cash balance during the bid period of $15 million.

QGC has proposed to redeem the notes in exchange for the issue to QGC of $30 million of 6 per cent convertible notes, subject to its bid becoming unconditional and QGC gaining control of the Sydney Gas board.
QGC says in its bid document that its refinancing proposal "provides certainty of repayment" of the existing convertible notes. SGL contends that's misleading and there is uncertainty as to QGC's refinancing proposal.

The argument is that, because conversion would amount to more than 15 per cent of the existing capital, SGL cannot issue the notes to QGC without shareholder approval. That would be piquant, given that QGC is insisting upon SGL shareholder approval for a raft of other matters.

QGC cannot ensure a meeting is held until it obtains majority ownership and board control (its bid is conditional on more than 50 per cent of SGL) and it would need to give SGL holders one month's notice. Its bid is not yet posted so it would be unable to hold such a meeting before the April 1 redemption is due.
Moreover, QGC would be unable to vote, which means that the other holders would determine the outcome. SGL would no doubt have to advise as to whether there is any realistic alternative - on terms as good as if not better - to QGC's refinancing proposal.

Even so, as SGL has some significant holders who won't be keen to accept QGC's offer it's possible that shareholder approval wouldn't be forthcoming.

QGC's position is that if it obtains less than full ownership it would apply to the ASX for a waiver of the need for a shareholders meeting, on the grounds that acceptances for more than 50 per cent of the company meant that the majority had already endorsed the bid, and the accompanying refinancing proposal.

If the ASX wouldn't grant a waiver then QGC would provide sufficient bridging finance (at 6 per cent interest) to redeem the notes, in lieu of the convertibles. That may satisfy the panel.
[email protected] "

As SGL has breached some of the conditions detailed in QGC's offer for SGL, QGC can now withdraw the offer.

Also, as the offer (heard it runs to 170 pages) is now in the hands of the Takeovers Panel for adjudication, it doesn't appear as though SGL shareholders will get to see the paperwork and consider the offer before Conv Notes are paid out in April.

Looking forward to hearing from SGL management about the reserves update/current drilling program (4 wells being fracced in March)/gas sales and so on.

Hope the "low ball" offer from QGC isn't too much of a distraction for management. Good that they retained Macquarie Bank to advise them - Macquarie also advising Atlinta on it's AGL move.

Anyone have an opinion of implications for SGL if it's joint venture partner AGL, is taken out by Alinta?