Anzon’s $250 million bid for Nexus has sparked a frenzy of debate about the respective values of the bidder and target. Both have substantial hydrocarbon exploration interests which are difficult to value, although Anzon has some production as well.
Nexus has strongly resisted the bid and included a report from Ernst & Young in its target’s statement which valued Nexus shares in a range of $0.94 to $1.44 with a most likely value of $1.13. Ernst & Young was influenced by a new estimate of contingent gas resources by Gaffney, Cline and Associates of 316 bscf to 438 bscf. The revised estimate was a substantial increase on previous estimates following reprocessing of existing seismic data from Nexus’ most advanced property—the Longtom appraisal project in Bass Strait.
Nexus also attacked the value of Anzon’s key asset—a 50 per cent interest in the Basker-Manta-Gummy producing property in Bass Strait. Ernst & Young placed a value on Anzon well below its market price.
Anzon’s expert—KPMG—raised numerous queries about the valuation methodology and assumptions used by Ernst & Young, suggesting its report does not comply with ASIC’s guidelines in terms of setting out assumptions and sensitivities and relied on out-of-date information pertaining to Anzon. KPMG performed a critique of the Ernst & Young valuation but did not perform its own valuation. Ernst & Young later responded to KPMG’s criticisms.
Blows have been traded about the potential of Nexus’ various exploration interests and the risks in proving them up and developing them, including the prospects of a drilling program scheduled for Longtom later this year.
Discussion of exploration potential
Giving guidance about the potential of exploration interests is a hazardous business.
On the one hand, shareholders have little to go on if they aren’t given some idea of the potential for such assets and what it might mean for them. However, the risks in realising that potential are often considerable and, even with appropriate disclaimers, shareholders could easily be duped (intentionally or otherwise) into placing insufficient weight on them.
ASIC urged Cultus shareholders to ignore statements about speculative resource potential made in response to OMV’s bid of a few years ago.
To date, the Panel seems willing to let the debate run—essentially allowing Nexus’ statements to stand on the basis that Anzon has an adequate opportunity to refute them. The Panel declined to hear an application by Anzon with respect to some of Nexus’ initial material (delivered at a Merrill Lynch conference) on the basis of Nexus’ offer to provide further information and bearing in mind that it would shortly make comprehensive disclosure in its target’s statement.
A comprehensive discussion about exploration assets which includes commentary on their potential commercial significance is likely to involve forward looking statements, which carry a heavier legal onus. This would encourage those making such statements to take great care in their preparation, make assumptions clear and otherwise comply with good practice in this area.
Capital raising
The bid also highlights issues surrounding capital raising activities undertaken during a takeover. Nexus launched a capital raising program which was initially intended to comprise two placements at $0.47 per share. The first tranche was placed just days before the bid was launched. The second tranche was repriced to $0.62 to reflect the higher market price following Anzon’s bid and extended to all shareholders. Anzon’s scrip consideration value has hovered around the $0.75 level.
As a pre-bid proposal, the capital raising would not be considered a frustrating action, notwithstanding the changes made. In any event, the second phase was substantially approved by shareholders.
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