Roc Oil Merger Offers Top Return as Spoiler Risk Fades: Real M&A

Jul 23, 2014 3:03 am ET

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July 23 (Bloomberg) -- Traders betting that Roc Oil Co.’s planned tie-up with an Australian rival will survive attempts by unidentified bidders to thwart the deal can pocket one of the biggest returns of any acquisition in developed Asia.

Sydney-based Roc and Horizon Oil Ltd. struck a $751 million agreement in April to combine oil and gas operations stretching from China to Malaysia. Roc, which owns stakes in projects backed by PetroChina Co. and Cnooc Ltd., has since received two approaches from potential acquirers it didn’t name.

With Roc assessing the merits of those proposals, Horizon shares yesterday traded 15 percent below Roc’s all-stock offer, the second-biggest discount of any major pending deal in the region this year, according to data compiled by Bloomberg. It’s not clear if the approaches for Roc are genuine, and as Horizon shareholders prepare to vote on their accord, Roc-Horizon is more likely to proceed than fail, said Northcape Capital Pty.

“Details of their offers are sketchy at best, which is never a good sign,” said Shannon Rivkin, a director at Rivkin Securities Pty, referring to the unnamed bidders for Roc. “The vast majority of non-binding approaches end in failure.”

Representatives for Horizon and Roc declined to comment on the prospects of the merger proceeding.

Merger Terms

Roc owns about 20 percent of an oilfield project that’s run by Cnooc in the Beibu Gulf off China’s south coast. It also operates an oilfield backed by PetroChina in Bohai Bay, off the east coast of China.

Together, Roc and Horizon would fetch a market value of about A$800 million ($751 million) and have assets in six countries including Malaysia, Australia and New Zealand, according to the April 29 announcement of the deal.

Under the terms of the agreement, Horizon stockholders would receive 0.724 of a Roc share for each one of theirs. That would give them 58 percent of the enlarged group. Horizon shareholders are due to vote Aug. 7 on the proposal, which doesn’t need the approval of Roc investors.

While waiting to close the Horizon deal, Roc said June 25 that it received a takeover approach, and then unveiled another bid on July 10. It described the two separate proposals as “confidential, unsolicited, indicative and incomplete” and said there was no certainty that either would turn into a formal offer.

Deal Risk

Roc had climbed 6.3 percent since revealing the first of those bids until yesterday’s close of 59.5 cents in Sydney trading. That valued the offer for Horizon at 43 cents. Horizon fell 4 percent in the same period and closed yesterday at 36.5 cents.

Among pending deals greater than $500 million announced in the region this year, only Singapore-listed Perennial China Retail Trust traded further below a bid, Bloomberg data show.

Today, Roc gained 0.8 percent to 60 cents at the local time close. Horizon added 1.4 percent to 37 cents.

The gap between Horizon’s stock and the value of Roc’s offer will narrow as time passes without details of either offer for Roc, said John Whiteman, a fund manager at Northcape, which has offices in Sydney and Melbourne. Northcape is Horizon’s fourth-largest investor with a 5.7 percent stake, data compiled by Bloomberg show.

“There’s a certain element of risk the merger deal won’t go through and so that’s being priced in,” said Whiteman. “On balance,” investors expect the deal to proceed, he said.

Roc will consider whether the two offers it received are genuine to ensure it isn’t “walking away from value,” Chief Executive Officer Alan Linn said in a July 11 interview.

Stock Bet

“So far these bids are highly conditional and uncertain,” Peter Strachan, a resources analyst at Perth-based StockAnalysis, said by phone. “There are a lot of tire kickers out there.”

Assuming the approaches evaporate, one option for investors is to bet Roc shares will fall, Strachan said. At the same time, they should buy Horizon stock because with or without a Roc deal, its prospects are positive, he said.

On its own, Horizon’s daily production of 5,000 barrels of oil equivalent this year will more than double by 2020, according to a June presentation on its website.

One Bidder

Not everyone says the merger is certain to go ahead. With more than one bidder circling Roc, its plan to combine with Horizon has less than a 50 percent chance of succeeding, said Simon Marais, Sydney-based managing director of Allan Gray Australia Pty. Allan Gray is Roc’s largest shareholder.

“The deal is far from done,” Marais said in an interview. “The stock market tells you there’s a very good chance this thing won’t go ahead.”

Marais said a combination with Horizon, which leaves Roc as the minority owner, increases Roc’s risk without boosting returns. His firm proposed this month that Roc obtain shareholder approval before being allowed to go ahead with the deal. The proposal failed.

With Horizon’s stock languishing below Roc’s offer, and given the potential payout, some traders are willing to bet the two approaches for Roc will come to nothing.

“Considering the offers are conditional and indicative at this point, they very possibly may,” according to Rivkin.