Following RockRose’s offer to buy the entire debt of its takeover target Independent Oil & Gas owed to London Oil and Gas (LOG), IOG has said that the offer significantly undervalues LOG’s interest in IOG, and IOG itself.
Namely, RockRose offered £40 million for the outstanding debt of IOG to Smith & Williamson LLP, administrators of LOG. The debt is owed to LOG, and in turn to London Capital & Finance (LCF) – both currently under administration.
RockRose deemed the offer fair and generous in light of the realistic prospects of recovery of the outstanding IOG debt in the short to medium-term.
However, IOG does not agree. It said that RockRose’s debt offer “cannot reasonably be described as fair and generous but that it demonstrates RockRose’s intention to acquire the loans at substantially below not only their fundamental value but also at a substantial discount to the see-through value of the already opportunistic possible offer, to the detriment of the creditors of LOG and LCF, while exploiting the unfortunate circumstances of holders of mini-bonds.”
IOG board said that the debt offer of £40 million seeks to acquire LOG’s convertible and non-convertible loans at around their current face value of £38.66 million. RockRose’s valuation therefore ascribes minimal value to the conversion rights attached to LOG’s convertible loans.
IOG also said that the offer itself lacks clarity as it is unclear whether or not the offer contemplates or attaches any value to LOG’s warrants in IOG.
On March 5, 2019, RockRose announced the terms of a possible offer for the entire issued and to be issued share capital of IOG, ascribing a value of 20 pence per IOG share.
Under the Takeover Code, if RockRose were to make an offer for IOG, it would be required to make an “appropriate” offer or proposal to holders of subscription rights, including LOG as a result of its convertible interests in IOG. The Takeover Panel’s guidance provides that an appropriate offer for such securities will normally need to be for no less than their see-through value i.e. the value of LOG’s convertible instruments by reference to the terms of the possible offer.
Based on the terms of the possible offer, LOG’s convertible loans have a see-through value of £41.1 million and LOG’s 8p and 11.9p warrants have a combined see-through value of £1.4 million. Absent the exceptional agreement of the Administrators to accept an offer or proposal for the convertible instruments at a lower value, the Convertible See-Through Value of £42.5 million would be the minimum “appropriate” consideration payable to LOG under the terms of the possible offer.
Combining this Convertible See-Through Value of LOG’s convertible interests with the £15.9 million face value of LOG’s non-convertible instruments, the total underlying value of LOG’s loan and warrant interests in IOG stands currently at £58.4 million; and excluding warrants, the total underlying value of LOG’s loan interests is £57 million, yet the RockRose Debt Offer is at just £40 million – a 30% discount, IOG said.
“Taken together, it is clear that the RRE Debt Offer is a transparent attempt by RockRose to deny LOG’s and LCF’s creditors, and by extension mini-bond holders, of fundamental value, seeking instead to reserve that value for the benefit of RockRose and Andrew Austin himself (as a major shareholder in RockRose),” IOG commented.
IOG reiterated its rejection of RockRose’s possible offer saying it is opportunistic and materially undervalues the company and does not attribute fair value to either IOG’s assets or their significant future upside.
IOG still looking for partner
“The board therefore unanimously concluded to reject this proposal unequivocally, and continues to focus its efforts on unlocking additional value for all IOG stakeholders by securing a farm-out partner for its core project to provide funding optionality, in parallel with advancing IOG’s stated capital markets funding plans,” IOG said.
The board’s rejection of RockRose’s approach was given with the full support of LOG and the administrators of LCF. Since that rejection, there has been no substantive engagement by RockRose with IOG, with RockRose seemingly electing instead to focus its efforts on pushing the Administrators to accept its derisory offer for LOG’s interests in IOG.
Fiona MacAulay, Chair of IOG, said: “The Board of IOG is focused on delivering value to our stakeholders via our already announced strategy to achieve FID for our sanction-ready portfolio of UK Southern Gas Basin gas fields. We are making good progress with shortlisted partners on our farm-out process and continue to believe that our strategy will deliver significantly better stakeholder returns than RockRose’s derisory proposals. It is disappointing to see RockRose trying to take advantage of LCF’s mini-bond holders by offering them a significant discount to the opportunistic possible offer to IOG shareholders, which already materially undervalues the company.”