PTTEP sole bidder for Cove, but shares down

Brokers are concerned that if PTTEP were to acquire the company, the deal would entail a capital increase, which would put a downside risk on its share price. 

Last Friday, Britain’s Takeover Panel decided to end the protracted Cove acquisition by issuing a ruling that in effect forced the two bidders, PTTEP and Shell, to revise their bids by the following Monday. If neither party did so, the bidding process would close and Cove’s shareholders would have to decide within two weeks whether to accept either of the bids. 

Bloomberg reported that Shell had, however, decided to pull out of the race for the British company. 

PTTEP’s offer of 240 pence (about Bt118) a share remains the highest bid on the table, and the exploration and production giant yesterday extended its tender offer until July 25.

CIMB Securities (Thailand) reiterated that it believed PTTEP was likely to emerge as the winner, acquiring Cove at a higher price than its current offer, which in itself was higher than Shell’s offer of 220 pence. 

“We maintain our ‘underperform’ rating and target price basis of a 25-per-cent discount to its discounted cash flow value [11 per cent], given the risk of capital-raising,” CIMB said.

The brokerage said it believed the most likely final offer by PTTEP was in the range of 250-290 pence per share, as the value accretion of Bt46 billion to Bt58 billion from Cove should be sufficient to justify the future risk of lower prices of liquefied natural gas (LNG) and compensate for the additional capital expenditures that PTTEP would need to spend on Cove’s Rovuma Offshore Area 1 project. It estimated these to be US$2 billion to $3 billion (Bt63.17 billion to Bt94.76 billion) over the next six years.

Meanwhile, Bualuang Securities gave a “hold” rating for PTTEP, given that Shell had now dropped out of the race for Cove Energy.

The brokerage said technically, the race remained open, as the submission deadline for third parties to place a bid is July 21. Nonetheless, it doubts that any potential suitors for Cove Energy will want to equal PTTEP’s bid, let alone make a higher offer. The transaction will, therefore, probably be completed by mid-August. Bualuang expects PTTEP’s net debt-to-equity ratio would as a result of an acquisition rise to 0.6 time from 0.3 time currently, breaching its policy threshold of 0.5 time.

It cited PTTEP management as saying that the company would use cash on hand of $1 billion, with debt financing making up the balance to finance the purchase of Cove Energy. 

“We believe that the size of the takeover will ultimately force a recapitalisation,” Bualuang research said, adding that based on Cove’s 8.5-per-cent stake in the Rovuma field, PTTEP would also have to spend at least another $1.8 billion to $2 billion on project development. 

Bualuang said this suggested a $1.3-billion recapitalisation, implying a modest 7-per-cent share-dilution effect. However, given that Cove Energy’s holding in the Rovuma field is small, it is conceivable that PTTEP would try to acquire further stakes in the field, in which case its recapitalisation needs would be significantly greater, the brokerage added.

PTTEP could raise its capital earlier if it thought it was at risk of a credit-rating downgrade, Bualuang added. Tisco Securities said it believed the market would respond to the news positively in the short term, but PTTEP stock prices were unlikely to increase considerably due to concerns over the risk of recapitalisation. 

 

PTTEP snapshot

Market cap: US$18.08 billion

Average daily turnover: $16.46 million

Free float: 33.7 per cent

Price target: Bt165-Bt185

Closing price: Bt171, down 1.16 per cent