Venture Production: Bid optionality
Posted by PG on Tuesday, June 2, 2009
Under: European Event-Driven Situations
Given John Paulson's theorem of protecting the downside while the upside will take care of itself, I wanted to highlight one UK company that displays a resilient growth profile, with a possible bid coming along:
Venture Production plc VPC LN: After Centrica, the UK energy company, bought a 23% stake at 725p a share on 18 March 2009, it indicated it could possibly make a full cash offer for Venture. However, immediately thereafter the Board at Centrica indicated that that this 725p price a share substantially undervalues the Company, its prospects and strategic position particularly with regard to its UK gas resources. We believe that with the stock trading at 800-825p, the downside on this situation is protected by the 725p with 850-1100p a share upside, given that Centrica might need to pay a strategic premium for its assets (North Sea oil and gas assets) to convince Board and shareholders. Given a) Centrica does not achieve much with only 22% of the company; b) a 725p offer approach will not be accepted by the board, and c) Centrica is believed to be securing GBP 1.5bn (EUR 1.6bn) of funding from Lloyds, Barclays Capital, RBS and other banks to acquire London-listed Venture; we feel there is an attractive downside-upside investment proposition around 800p levels.
On 29-May 2009 Standard & Poor's lowered its long and short term credit ratings on Centrica to 'A-/A-2' from 'A/A-1' and noted that Centrica is structurally short of both gas and electricity assets relative to its competitors in the energy supply market, which creates significant volatility in its consolidated cash flows. Standard & Poor's anticipates that a buy out of Venture Proudction would reduce Centrica's business risk by lowering its exposure to wholesale gas and electricity prices. However, the reduced business risk will be offset by higher financial risk, since Centrica's cash flow coverage of net adjusted debt would weaken. We still believe that Venture Production is a strategic asset for Centrica, which already has put its focus on it by acquiring the 22% of the company, and would be expecting a full buy-out with a strategic buyout premium attached in the short/medium term.
Venture Production plc VPC LN: After Centrica, the UK energy company, bought a 23% stake at 725p a share on 18 March 2009, it indicated it could possibly make a full cash offer for Venture. However, immediately thereafter the Board at Centrica indicated that that this 725p price a share substantially undervalues the Company, its prospects and strategic position particularly with regard to its UK gas resources. We believe that with the stock trading at 800-825p, the downside on this situation is protected by the 725p with 850-1100p a share upside, given that Centrica might need to pay a strategic premium for its assets (North Sea oil and gas assets) to convince Board and shareholders. Given a) Centrica does not achieve much with only 22% of the company; b) a 725p offer approach will not be accepted by the board, and c) Centrica is believed to be securing GBP 1.5bn (EUR 1.6bn) of funding from Lloyds, Barclays Capital, RBS and other banks to acquire London-listed Venture; we feel there is an attractive downside-upside investment proposition around 800p levels.
On 29-May 2009 Standard & Poor's lowered its long and short term credit ratings on Centrica to 'A-/A-2' from 'A/A-1' and noted that Centrica is structurally short of both gas and electricity assets relative to its competitors in the energy supply market, which creates significant volatility in its consolidated cash flows. Standard & Poor's anticipates that a buy out of Venture Proudction would reduce Centrica's business risk by lowering its exposure to wholesale gas and electricity prices. However, the reduced business risk will be offset by higher financial risk, since Centrica's cash flow coverage of net adjusted debt would weaken. We still believe that Venture Production is a strategic asset for Centrica, which already has put its focus on it by acquiring the 22% of the company, and would be expecting a full buy-out with a strategic buyout premium attached in the short/medium term.
In : European Event-Driven Situations
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