Political risk in M&A illustrated



The above chart of Verenex Energy (TSX: VNX) shows how M&A arbitrageurs need to carefully consider political risk. This was an M&A deal I was tracking closely and was thinking of investing in it if the return was 20% or more (it never hit my required level.) The stock is off around 20% right now and was down as much as 30% on news that Libyan authorities are investigating it.

Verenex is a small oil & gas exploration company operating in Libya. China National Petroleum Corporation offered to buy the company. The Libyan national oil company had right to match any offer and Verenex was waiting for approval from them. Well, taking a page out of the Russian government playbook, Libyan authorities are investigating the legality of Verenex's qualification for the field it purchased about four years ago:

Collectively, the two letters advise that legal authorities in Libya are investigating allegations that Verenex was improperly pre-qualified to bid in the EPSA IV first bid round in January 2005, under which Verenex acquired its rights to Area 47 in Libya. The letters further state that the ongoing investigation does not affect the rights and obligations of Verenex, and likewise does not affect the plans of the NOC related thereto, and the GPC has not provided its final decision on the NOC's intention to exercise a pre-emptive right.

Verenex considers these allegations to be without merit and vigorously denies them. No specific improprieties or details of the allegations have been provided to Verenex. The Company observes that the allegations are being made more than four years after the award of exploration rights in Area 47 under a transparent bid process and coincident with a request for consent for the sale of the Company.


The market was already accounting for the political risk, and anyone looking at a risk arbitrage position would have as well. It's always hard to peg the political risk involved in these deals. You can also never be sure that the company didn't anything illegal. Many small companies, but at times also large ones, engage in unethical and illegal practices, such as offering bribes, kickbacks, etc. I'm not saying Verenex was engaged in these activities but just saying that it is difficult to say what actually happens in those countries. It's possible that this is an attempt to scare off the Chinese or other potential bidders but one can never be sure.

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