PetroChina-Shell increase bid for Australia's Arrow to $3.1 billion

A consortium made up of PetroChina and Shell has gained the backing of the board of Australian energy company Arrow Energy for a takeover, with an increased bid of $3.1 billion. The bidders will also leave more assets on the table for the seller.

On a per share basis the buyers are now offering A$4.70 ($4.29) per share, up 5.6% from their earlier offer of A$4.45. The price represents a premium of 35% to both the last closing price of Arrow and the one month volume-weighted average price before the original bid was announced on March 8.

Shareholders of coal-seam gas company Arrow are also being offered one share each in Dart Energy, a new company to be listed on the Australian Securities Exchange. Additional assets have been added to Dart since PetroChina and Shell first announced a takeover bid for Arrow earlier in March. 

Arrow's international assets, including exploration and coal-seam gas projects in China, Indonesia, Vietnam and India, will be demerged into Dart, as already announced. Dart will also house Arrow's Australian-listed investments which comprise a 21% shareholding in Apollo Gas, a 1.4% shareholding in Bow Energy and a 7.5% shareholding in Liquefied Natural Gas. Further, A$45 million of cash will be transferred from Arrow to Dart, and Shell will extend a $25 million loan to the new company, enabling Dart to commence business with an initial capitalisation in excess of A$70 million.

Dart will be led by the existing Arrow management team, Nick Davies, Shaun Scott, Stephen Bizell and Graham Yerbury. PetroChina and Dart expect to ink cooperation agreements in the future, specifically related to Dart's exploration plans in China.

The deal is subject to regulatory approvals, including an approval from Australia's Foreign Investment Review Board (FIRB). Sources close to the transaction say that initial feedback from FIRB has been encouraging and the transaction structure has been designed to minimise FIRB concerns.

Arrow's largest shareholder, New Hope Corporation, which controls 16.7% of the Brisbane-based firm, has not yet issued a formal statement regarding its plans to tender its shares. However, sources said that New Hope, which acquired its original shareholding in July 2006, was looking to sell recently and, in the absence of a competing offer, should be willing to tender its shares to Shell-PetroChina. As of July last year, New Hope's cost of acquisition was A$119.3 million, meaning the Queensland-based coal company stands to book bumper profits on its investment.

Arrow Energy is advised by Citi and UBS, with legal advice from Gilbert & Tobin. PetroChina was advised by Morgan Stanley on the joint venture with Shell, while Shell was advised on the JV by NM Rothschild. Morgan Stanley and Rothschild now jointly advise the buyer consortium on the bid for Arrow, with legal advice from Allens Arthur Robinson and Mallesons Stephen Jaques. Shell and PetroChina have come together in a partnership of equals, said a source, with neither partner having the upper hand.

Arrow shares fell around 4% on the ASX yesterday to A$5.10 as shareholders who had been hoping for more cash on the table were disappointed that the deal is being recommended by the board after a mere 5.6% increase.