Regulatory arbitrage with Tony & Nat – redux | FT Alphaville

Regulatory arbitrage with Tony & Nat – redux

More on Tony Hayward’s first big oil deal at his new investment vehicle Vallares– the $2.1bn acquisition, via a reverse takeover, of Turkish E&P company Genel Energy.

We have already mused on whether Genel would be allowed to list in London given the share dealing misdemeanour’s of its executive team, which are detailed in this FSA release.

And thanks to Wednesday’s merger agreement we can see how Vallares can calm any regulatory concerns about Genel obtaining a premium London stock market listing via a rather circuitous route.

As suspected, Hayward and his sidekick Julian Metherell will take operation control of the merged entity, while Genel’s CEO Mehmet Sepil — who was fined nearly £1m by the FSA for market abuse — will be appointed president but will not sit on the board of directors.

However, Sepil and Genel’s majority shareholder Mehmet Karamehmet, who is currently appealing against an 11-year jail term handed to him last year in relation to loans made when he owned a bank, will still have plenty of influence.

Both will be able to nominate a representative to the board and they will also retain large holdings in the merged company, which given its size will enter the FTSE 100 some time next year.

That said, Sepil and Karamehmet have agreed that part of the consideration they receive will be in the form of suspended voting shares in order to ensure that their aggregate holding of Ordinary shares will not exceed 29.9 per cent — the threshold for a mandatory bid in the UK. (In total, Genel shareholders will own half of the new company.

The Suspended Voting Ordinary Shares will automatically convert into Ordinary Shares in the event of further equity issues by Vallares provided that following conversion the Sellers’ aggregate holding of Ordinary Shares does not exceed 29.9 per cent of the total number of issued Ordinary Shares.

These important technicalities aside, we have to concede that Hayward and his backer Nat Rothschild have struck a good a deal for Vallares shareholders.

The cash shell is acquiring acquiring 356m barrels of oil on a 2P basis or 1.4bn barrels of unrisked resource, for $5.9 and $1.5 per barrel respectively. That’s an attractive price, according to one sector watcher.

We typically value undeveloped Kurdish assets at around $3.5/barrel, hence given that Genel is already in production this looks a reasonable price for Vallares, especially given the prospective upside. Kurdistan is certainly one of the industry’s current hot spots, despite the ongoing wrangling between the Kurdish govt and Iraq over fiscal terms for the oil industry.

And there’s plenty of exploration upside, as Vallares spells out very clearly in today’s statement.

Genel’s exploration portfolio, which Hayward described as “the most exciting element of this transaction”, comprises interests in six licences and runs from Peshkabir in the North of the region to Chia Surkh in the extreme South. Results from the Summail-1 well, which began drilling in April in the Dohuk prospect, are due before the end of the year.

A further five exploration wells are planned over the next 12 months to assess the full potential of the acreage. The exploration activity is targeting a total resource in excess of 750 million barrels net to Genel.

But we shouldn’t forget that Hayward et al also stand to make a fantastic amount of money from the merger.

From the FT:

The founders of Vallares, who include Mr Hayward and financier Nathaniel Rothschild, are entitled to a 6.67 per cent stake in the new group within six months of the completion of the deal.

This would be worth about $300m and Mr Hayward personally is in line for 8 per cent of that or about $24m, according to people familiar with the matter.

In addition, Mr Hayward and other founders could receive additional shares subject to meeting performance targets.

And that ladies and gentlemen is the price you have to pay if you want a London listing with the Tony & Nat seal of approval.

Related links:
Untying Vallar’s Gordian knot – FT Alphaville