After the 24/7 Real Media blow-up—for those not familiar, this was an M&A deal where I purchased shares based on a rumour of some price that Microsoft was going to bid—I said I wouldn't take positions in M&A deals that haven't been officially announced. Well, I'm tempted to take a position in the following rumoured deal. Still not sure but we'll see.
Marketwatch picked up a story from Times Online suggesting that Sinopec will bid 4.8 billion (pounds) for Addax Petroleum (TSX: AXC).
Addax Petroleum Corp., owner of one of two operating oilfields in Iraqi Kurdistan, received a 4.8 billion pound (US$6.25 billion, C$8.83 billion) proposal from Sinopec of China, the Times of London reported on Sunday.
Addax shares closed on Friday at C$43.99. The current market capitalization for the stock is C$6.89 billion.
Addax is a mid-sized oil & gas producer (around 100,000 bpd) with properties in West Africa and Iraq (Kurdistan). It is located in Geneva, Switzerland, but is listed on the TSX and LSE.
Depending on the price and exchange rate, you are looking at around 28% return if the rumoured deal goes through. It is likely that a deal will be cut (Chinese media also reports Sinopec interest) but the question is the price. The stock is up a bit over 100% this year, with probably 40% to 50% solely from rumoured takeovers.
The majority shareholder has blocking interest so whether a deal is accepted, or at what price, will be dictated by a single individual. It is also not clear if there will be regulatory problems, although I don't foresee any problems given the good relations China has in the relevant regions.
It is also not clear what currency will be used in the final contract. There is sizeable risk for Canadian investors from currency fluctuations. The C$ (largely against the US$) has rallied 15% in the last 3 months alone. I don't think the C$ will strengthen against the US$ but it may strengthen against the British pound. Since the buyout may be priced in pounds, this is a real risk (especially if the pound collapses due to political or economic problems.)
As for the time frame, I am guessing it will take one to one-and-a-half years to close.
I think there is a downside of 30% to 50% if the deal fails. But the underlying assets seem attractive (note: I haven't taken a detailed look).
Anyway, I'm thinking about taking a small position. It's risky to speculate on M&A without knowing the details of any deal but...
Tags: Addax Petroleum (TSX: AXC)