no time to waste - article in australian

No time to waste

IF Arrow Energy intends to stay in the contest for control of coal seam gas (CSG) explorer Pure Energy it must act fast.

That's because the independent directors and two major shareholders, Karl Meade and Tom Fontaine -- who between them own just on 30 per cent of Pure -- have indicated that they intend to accept BG's rival offer tomorrow, in the absence of a superior offer.

Arrow already owns 19.8 per cent of Pure, while the oil major Shell, which owns 30 per cent of Arrow's CSG tenements, has 15 per cent. Were Arrow to secure the holdings of the independent directors and the major shareholders, it would have its foot on at least 40 per cent of Pure, and potentially 55 per cent.

But if BG gets those holdings it would lift its stake to 30 per cent.

Arrow kicked off the bidding contest with a recommended scrip and cash offer of 1.21 Arrow shares plus $3 cash for each Pure share, which valued Pure shares at $5.40 on Arrow's then-share price of $2.23. The independent directors, the two major shareholders and Shell all said they intended to accept the Arrow offer in the absence of a superior offer.

Pure entered into no shop, no talk and break-fee arrangements with Arrow, which also gave Arrow the right to match or better any higher competing bid, within two business days of being notified by Pure of the rival offer.

BG came over the top with a cash offer $6.40 a share but Arrow responded within two days by lifting its bid to 1.57 Arrow shares plus $3 cash. Arrow's shares had by then risen to $2.65, valuing its revised bid at $7.16, which was sufficient to maintain a recommendation by Pure's board.

Undaunted BG came back last week with a cash bid of $8 a share and this time the Pure independents recommended the BG offer on the following day, without waiting to see whether Arrow would match or better it.

This time, Arrow didn't avail itself of the two-day matching opportunity. It's now been a week since BG lifted its bid and Arrow is yet to make up its mind.

One difficulty for Arrow is BG is offering cash in a climate where cash is king, while the value of Arrow's offer varies in line with Arrow's share price. At yesterday's closing price for Arrow of $2.44 the value of Arrow's offer has slipped to $6.83 -- 15 per cent below BG's offer.

When Arrow first bid, Pure's directors considered there was upside in the scrip component of the $5.40 offer. But they consider that upside is more than accounted for now that BG has lifted the ante to $8 cash a share.

Pure's directors yesterday released their target's statement in relation to the Arrow offer. They recommended rejection, on the grounds that it was inferior to the BG offer, and they considered that BG's offer provided immediate value certainty that was preferable for Pure's shareholders in the current economic environment.

The independents and the two major shareholders also said they intended to accept BG's offer.

To regain a board recommendation Arrow would almost certainly have to offer at least $8.40 to $8.50 to overcome the certainty of cash. Assuming an unchanged cash component of $3 a share would indicate the need to lift the scrip component to between 2.2 to 2.25 Arrow shares per Pure share. At $3.50 cash the scrip component would fall narrowly to 2 to 2.05 times. That would be quite dilutive to existing shareholders and indicates why Arrow is taking longer to decide this time around.

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