Panta Capital

On 05-Nov-09, Verenex Energy Inc. announced it had entered into a definitive arrangement agreement with the Libyan Investment Authority  pursuant to which the LIA, through a subsidiary, has agreed to acquire all of the Verenex shares issued and outstanding upon completion of the transaction at a price per share in cash equal to $7.09 plus an additional working capital amount per share. The definitive agreement comes (as expected by Panta Capital) after Verenex signed the binding memorandum of understanding with the Libyans on 18-Sep-09.

We believe that all remaining conditions of the agreement should easily be fulfilled:

- Shareholder approval: The agreement has been made subject to minimum shareholder approval of 75% of the votes cast at the EGM. Given that Vermillion (Verenex 45.2% shareholder) has agreed to accept the offer, we expect other shareholders to follow suit given the lack of other credible sale alternatives/being at the mercy of the Libyans. 
- Positive working capital amount: Based on preliminary estimates agreed to by the LIA, Verenex expects the Working Capital Amount to be a nominal amount of approximately $0.15 per share, assuming completion of the transaction in mid-December. 

Given the expected fulfilment of all conditions and the short duration of the deal (expected completion at mid-December 2009), we remain buyers at current CAD 7 levels to realize a minimum return of 1.2% (annualized 15.4%) with CAD 0 working capital proceeds distribution or return of 3.4% (annualized 41%) with CAD 0.15 (in line with Verenex management estimates) working capital proceeds distribution.

After the DoJ cleared the AT&T acquisition of Centennial Communications on 13-Oct-09, the deal got equally approved by the Federal Communications Commission (FCC) on 05-Nov-09. Hence, as anticipated by Panta Capital, the deal has now been completed and settlement is expected this week, to realize the net return of 14.9% (annualized 44%) since our first post at 14-Jul-09 and/or  the net return of 8.3% (annualized 50%) since our second update at 17-Sep-09. 

London/Zurich, 06 November 2009

 

RE: Open letter to Cisco on the proposed acquisition of Tandberg

 

Dear Mr. Chambers, Dear Mr. Hooper,

 

Since making a public offer to shareholders you have also made comments to the press regarding the value of your offer and on Cisco’s broader M&A principles. As we near the end of your offer period and on behalf of Tandberg shareholders, we feel it necessary to address certain points on the value of your offer with you directly.

 

While we fully agree with your statements that each corporate entity should respect the broader principles of prudence and financial fairness in pursuing an active M&A strategy, we also believe that in this specific case your offer does not reflect the true value of Tandberg’s business prospects nor does your offer reflect the premium to market value that you claim it does:

 

· You have noted that Cisco’s offer represents a 38.3% premium to the closing share price on July 15th (one day prior to major media reports of a possible transaction but months before your actual offer). We fail to understand why you pick July 15^th as a reference date. Tandberg has been mentioned as a take-over candidate on various other dates in the last 18 months with Silver Lake Partners being named on a number of occasions as an interested party. Your argumentation that your offer represents a 38.3% premium to Tandberg’s July 15^th share price is also a misleading one. Put into perspective, between the 15^th of July and the 1^st of October, the Oslo Benchmark Index appreciated 27% in $ terms while Tandberg’s main competitor Polycom also saw its shares rise 23% neither of which are a reflection of your offer.

 

· We also fail to see any premium reflected in the NOK153.5 offer compared to:

o Tandberg’s historical trading valuation: NOK153.50 represents a mere 5% premium over Tandberg’s historical forward 18.6 PER valuation.

o Peer valuation: NOK 153.5 translates into 19.2x 2010 consensus EPS, which hardly shows an acquisition premium to Tandberg’s main competitor Polycom’s trading valuation at 18.5x 2010 consensus EPS.

o Operational Performance: Since the offer was made, Tandberg has posted Q3 results beating top-line consensus estimates by 8% and operational earnings consensus by 4%.

 

· While Tandberg’s share price has appreciated in concert with fervent bid speculation, Tandberg’s share price appreciation can be explained by its operational outperformance: since the economic downturn started at the end of 2007, 2009 consensus EPS estimates for Tandberg have fallen only ~ 9%. This compares to revisions in the S&P Info Tech sector and Polycom whose 2009 consensus EPS estimates were slashed by ~ 30% and ~ 45% respectively. An offer at NOK 153.5, which values Tandberg in-line with Polycom, can in our view not be justified as an attractive offer.

 

· Tandberg’s long serving board chairman Jan Chr. Opsahl’s believes that as a standalone company it could take Tandberg 10-15 years to move from a revenue level of USD 1bn to USD 10bn or about 5 years to achieve that same USD 10bn if it were part of Cisco. We see this as evidence to reflect a further mismatch between the offer price and the future growth profile.

 

Given your conviction that video conferencing will become the core of the USD 34 billion dollar collaboration market, we believe the NOK 153.5 per share offer undervalues the significant growth profile of Tandberg, the market leader of the video conferencing infrastructure market.

 

We believe that a higher, more appropriate price for the acquisition of Tandberg, taking into account its growth profile and the substantial scope for sales and cost synergies, is not in conflict with Cisco’s respect of the principles of prudence and financial fairness.

 

Respectfully,

 

 

 

Peter Germonpre                                                                           Dan Scott

Panta Capital                                                                                  Scott & Associates AG

As highlighted in our Aug-09 entry, the high likelihood of a bid for Tandberg ASA materialized today with a recommended NOK 153.5 per share bid for Tandberg from Cisco, the US technology mammoth. The Cisco bid comes after 15 months of speculation of any possible bid for the company. The offer, which is not subject on any financing, is fully recommended by Tandberg's board. The offer is expected to close 1H10 and should not have any regulatory issues as Cisco has very limited presence in the videoconferencing market. Cisco also stipulated it has the right to match any competing bid within 4 days. 

If succesful, we believe Cisco will have gotten Tandberg on the cheap as the offer only represents an 11% premium to Tandberg's last NOK 138.3 trade on 30 September 2009. Tandberg is being taken out at 19.2x 2010 EPS, which is in line with Tandberg's closest competitor, Polycom's trading valuation at 18.5x 2010 EPS. We believe there is a chance that other bidders like HP, Alcatel-Lucent or PE groups might emerge and counterbid steeper premiums for Tandberg's strategic value -which commands more than 40% market share in the structurally growing videoconferencing market.  

Given the limited downside (represented by the bottom value of the NOK 153.5 offer), we would be buyers at the current NOK 154 price to play any potential counterbid for Tandberg ASA.  

As anticipated by Panta Capital on 22-Sep-09, Just Retirement (JR/ LN) reached agreement on the terms of a recommended bid by Avalon, a newly incorporated company owned by funds advised by Permira Advisers. Under the terms of the proposal, Just Retirement shareholders will receive 76p cash per share, and will be implemented by a court-sanctioned scheme of arrangement.

The scheme -which has no competition approval risk- has already received irrevocables/acceptances of 67.3% of Just Retirement's existing issued ordinary share capital and only needs another 7.7% of Just Retirement's shares to accept the offer for the Scheme to become effective on the minimum 75% share acceptances condition. 

Given the short duration of the scheme and the very high likelihood of completion, we remain holders of Just Retirement shares. We would add more if the share price falls under the 74p price level, to achieve a 2.7% return over 2 months (annualized return of 16% assuming end-Nov completion).

On 18-Sep-09, Verenex Energy Inc (VNX CN - VRNXF.PK), the Canadian oil and gas exploration company, announced and recommended a binding memorandum of understanding (MOU) to sell all its shares to the the Libyan Investment Authority for CAD 7.09 a share plus any residual positive working capital. A definitive agreement is expected to be signed by 20-Oct-09, at which time, the Libyans will escrow the necessary funds to complete the transaction. This offer comes after the Libyans themselves blocked a CAD 10 per share offer from the China National Petroleum Corporation on 08-Sep-09. 

Although there is always room for more creative gamesmanship from the Libyans, we believe that Verenex's current CAD 6.25 share price (or minimum 13% spread to the CAD 7.09 + working capital offer price) reflects excessive fear for non-closure of the deal (mainly attributed to the past observed behavior of the Libyan partners). 

We believe, however, that -in this long Verenex story, which commenced a sale process late 2008- this deal at last provides clarity with regards to both price and timing, and that the memorandum conditions of due diligence, regulatory, court and shareholder approval should now be easily fulfilled in the short-term:
 
1) Shareholder approval is highly likely as firstly, Vermillion -Verenex's 45% shareholder who was involved in the negotiation process with the Libyans- has already agreed to tender its shares. Secondly, other shareholders are expected to follow suit given the lack of other credible sale alternatives/parties and the risk of being at the mercy of the Libyan powers, should a deal not be approved (e.g. any significant decisions on Verenex's Libyan operations need to be approved by the Libyans, such as the commercial development of their Area 47; any extension to the Libyan exploration term beyond March 2010).
 
2) Regulatory approval: Given the fact that the transaction has already received all necessary Libyan government approvals, we do not see any regulatory risk as more than 85% of Verenex' assets are in Libya.
 
3) Due diligence completion: As the Libyans are familiar with Verenex's Libyan assets and its technical data, we believe that the due diligence process is restricted to the financial and judicial data, we do not expect material difficulties for this normal course of action.
 
As we believe the conditions for the memorandum of understanding are to be fulfilled, we would recommend to buy Verenex around the CAD 6.25 price and receive the CAD 7.09 + working capital proceeds (estimated around CAD 0.15-0.20 a share) in the first half of 4Q ‘09, realizing a minimum return of 13.4% (annualized 80% return assuming end-Nov closing). 

On 26-Jun-09, Permira, the UK private equity fund, announced that it was considering a possible offer of 76p a share for Just Retirement plc, the UK life assurance group. This announcement followed more than 10 months after Just Retirement said it had received expressions of interest in the company - which apparently had come after its 52.29% founder/shareholder -Langholm Capital- had initiated a possible sale of the company.

Since the Jun-09 provisional 76p offer announcement, Just Retirement's Board has agreed with Permira to set the date by which Permira would need to submit a firm proposal to the board at 25-Sep-09. Just Retirement has committed to pay GBP 2.3m to Permira if the firm 76p a share bid it tables is not recommended within three business days of midnight of the 25-Sep-09 deadline. 

Since Permira announced its provisional offer, it has approached Just Retirement's CEO to be involved in the possible bid and has already obtained irrevocable undertakings for the 76p bid from at least 59.89% of Just Retirement's shareholders (52.29% from the founder Langholm; and 7.6% from CEO Mike Fulller). 

Given: a) the high level of irrevocables, b) the high level of due diligence already done by Permira, c) the board's incentive for a recommended bid, and d) the desire of the majority shareholder/founder to sell at the provisional offer price, we believe there is a high likelihood of the firm 76p bid to come through by midnight of 25-Sep-09, and would recommend to buy Just Retirement's at the current 69p level. Given the belief the offer will be tabled as a scheme of arrangement, we would expect the deal to close by end November 2009, realizing a return of 10.1% over 2 months (annualized return of appr. 60%). 

On 14-Sep-09 AT&T and Centennial Communications announced that they now expect the $8.50 per share acquisition of Centennial to be completed early in the fourth quarter of 2009. This statement comes after their first delay announcement on 08-Jul-09, stating then that the transaction would be completed in the third quarter of 2009 instead of the first half of 2009. 

Although the new statement brings further delay to the closing of the deal, the statement shows confidence in obtaining the regulatory approvals from both the DoJ and FCC. The fact that the statement uses the word 'early 3Q09' shows that the companies now have a clearer view on when the processes should be finalized. Further confirmation of the possible regulatory clearance outcome for the deal is shown by the 09-Sep-09 communications between the companies and the FCC: the fact that AT&T seems to be moving ahead with the FCC review indicates that AT&T and Centennial have reached some level of comfort at the DoJ. 

We believe that the deal is likely to be completed by end-October and hence would recommend to buy Centennial at $7.85 and gain the 8.2% merger spread (annualized 65%+ return -assuming end-Oct closing). 

Several German media have been reporting that Heidelberg Druckmaschinen AG (HDD GY), the German based number one global offset printing press maker, is considering a merger with manroland AG, the privately owned global number two player. Although not confirmed by either company, the reports have been mentioning that both companies have hired investment banks to advise on a potential deal, and that the talks have been triggered by Allianz, which owns 65% of manroland and 12% of Heidelberg.

Although such a deal would make perfect sense from a (cost) synergy point of view, there are significant number of obstacles for any value creating merger scenario:

1) Competition approval: If a manroland-Heidelberg Druck merger would be announced, we would be highly sceptical of US and European regulatory approval for such a combination, given that the tie-up would create a company with 65% of the (global) global sheet-fed printing market.
2) Hard cost savings potential: Although a merger would realize significant value by overlapping job cuts, we believe that such cost savings would be less easy to achieve after Heidelberg received a €645m government loan guarantee in August 2009 (i.e. 50% guarantee of a €300m KfW state-owned bank loan and 90% guarantee of a € 550m bank loan). A transfer of the guarantees to a new merged company structure would require the approval of the governments, who are particularly sensitive to job cuts, and could prevent the realization of significant (job cuts) cost savings value. Cost savings will need to be realized on top of the low-hanging fruit restructuring and cost cutting activities which Heidelberg has already achieved.
3) No solution for the structurally declining business: With the gradual shift away from traditional print media advertising to non-print (internet), the offset printing market is in structural decline: the commercial printing equipment market did not grow in the last boom cycle, and further declines will happen even if the next upcycle is ready to start. A combination of 2 entities in this market will not solve this situation, but will result in a combined entity that will face tougher pricing environments and further margin pressure.
4) Merger exchange ratio highly likely to be less advantageous for Heidelberg: With Allianz expected to be the main driver behind the merger process and a 65% shareholder in manroland and a 13% holder in Heidelberg Druck, we believe that Allianz will favour more beneficial merger terms for manroland than for Heidelberg.
5) A merger scenario does not remove the need for rights issue: Although the new financial package that Heidelberg signed with the German governments/banks prevented its immediate bankruptcy, the group continues to stack up losses and bleed cash (expected 2009 year end net debt of €760m on 2009E EBITDA of 41m). We believe that manroland -being private equity owned- carries an equally large net leverage.

We, hence, recommend investors to short Heidelberger Druck on manroland merger news driven share price strength.

After the Cosmen family - CVC Partners bid consortium raised their indicative cash offer on 03-Sep-09 from 450p to 500p a share for National Express Group (NEX LN), the UK bus and train operator, its current 465p share price (or 7.5% spread to the 500p price) reflects the risk of the unmaterialisation of a succesful firm bid from the consortium.

Although the indicative cash offer is conditional on financing and due diligence, we believe the main risk is obtaining shareholder willingness and Board recommendation for the 500p a share offer level. Such a Board recommendation would avert the capital raising/rights issue which the Board and a majority of shareholders were prefering over the initial 450p offer from the bid consortium. We understand that the 500p level (with fewer material conditions attached than the original 450p offer) is now being considered seriously by those (institutional) shareholders who had previously preferred the rights issue and had backed National Express' Board rejection of the 450p approaches. The less conditional 500p bid also seemingly reflects the level that the Board had in mind for possible recommendation when the original offers were tabled much lower (400-450p).

Given the highly likelihood of the company opening its books now to the bid consortium, and recommending the 500p bid, we recommend to buy National Express at 460p levels and realising the 8.5% net spread or an annualised return of 34% -based on a Dec-09 closing assuming a firm public offer or Scheme of Arrangement to complete 2 months after the early October bid consortium's due diligence completion.