Ophir Energy (LSE: SMDR) issued a statement this morning confirming that it has made an offer for Salamander Energy (LSE: SMDR).
According to Ophir, the deal would be a share exchange offer, meaning that Salamander shareholders would receive Ophir shares, not cash, in exchange for their Salamander shares.
The share-only nature of the proposed deal isn’t a really a surprise, given Ophir’s lack of any regular revenue streams, but the rumoured 106p valuation seems rather opportunistic — October’s oil price slide sent Salamander shares down to around 80p, but for much of the year Salamander’s stock has been trading at 100p.
Does the deal make sense?
Salamander’s share price has suffered this year, due to market sentiment, some disappointing drilling results, slow production growth and most recently the falling price of oil.
The firm’s finances have become stretched, with net gearing of more than 100% and flat revenues — meaning that Salamander’s July deal to sell a 40% interest in flagship asset, the Greater Bualuang Area, to Malaysian firm SONA for $280m, was well received by shareholders.
However, investors had been hoping for an outright takeover deal. Reported approaches earlier this year came to nothing, but Salamander’s board now appears to have a second bite of the cherry, as it is currently in sale talks with both Ophir and Spanish firm CEPSA.
For Ophir, the logic behind the deal is clear: the firm says by acquiring Salamander, it can become more financially self-sufficient, reinvesting cash flow from Salamander’s production assets into its exploration activities. Ophir is also keen to expand into South-East Asia, and has recently acquired exploration assets in Indonesia, where Salamander already operates.
Historical connection
It’s worth noting that Ophir’s chief executive, Nick Cooper, co-founded Salamander back in 2005, so knows the company very well.
Dr Cooper also still reportedly owns 850,000 shares in Salamander, meaning that a successful deal could earn him a windfall of 480,000 shares in Ophir, at an attractively low price, and would increase his total Ophir shareholding by 60%, to 1.25 million shares.
My verdict
Ophir looks attractive at today’s share price, and I believe the firm could be a profitable investment over the next 5 years.
In contrast, Salamander’s near-term growth prospects look limited, at best, and in my view, the firm’s board should use the bid interest from Ophir and CEPSA to negotiate the best possible deal for shareholders.