KNOC to pay $3.9 billion for Harvest Energy Trust

Korea National Oil Company (KNOC) has entered into an agreement to buy Canadian energy company Harvest Energy Trust for C$4.1 billion ($3.9 billion). The purchase by the state-owned company is the second largest ever outbound M&A transaction made by a Korean company, according to Dealogic data, following Doosan's $4.9 billion acquisition of the bobcat, utility equipment and attachments business units of Ingersoll Rand in July 2007.

KNOC will pay C$1.8 billion for all of Harvest's issued and outstanding trust units, valuing each unit in the company at C$10. KNOC will also assume C$2.3 billion of the Canadian company's debt. The debt is made up of C$1.1 billion of bank loans, C$250 million of senior notes and C$916 million of convertible debentures.

Overall, this values the target at a 47% premium over the 30-day weighted average trading price of the units up to October 20.

Among the Canadian oil company's assets are an upstream business in western Canada and a downstream business in Newfoundland. The exploration and development side of the company has reserves made up of around 70% crude oil and 30% natural gas. The downstream business is made up of a hydrocracking refinery and its ancillary assets.

Once the deal is completed, KNOC's reserves will increase to over 380 million barrels of oil from the 230 million barrels it had in March 2009. It will also add another 51,000 barrels to its current daily production capacity of 75,000 barrels.

By absorbing these assets, KNOC is undertaking the Korean government's plan to acquire reserves in order to minimise disruptions in supply. The deal will see Korea's self-sufficiency in oil and gas increase to 8% of domestic demand, from the current 6.3%. It will also move a step closer to meeting the government's goal of increasing KNOC's daily production to 300,000 barrels per day by 2012.

Like many of the countries in Northeast Asia, Korea is heavily dependent on imported commodities to meet its energy needs. The country is therefore looking to make acquisitions in the sector whenever it can.

At the beginning of the year, KNOC teamed up with Colombian oil company Ecopetrol to jointly acquire Offshore International Group (OIG) for $900 million. OIG's main asset is Petro-Tech Peruana, a company involved in hydrocarbon production and gas processing in Peru. And in 2008, KNOC and Samsung Corporation bought oil and gas assets in the Mexican Gulf from Taylor Energy Company for $1 billion. Yesterday's acquisition however, is by far the largest ever made by KNOC.

The deal is subject to the approval of 66.6% of Harvest's unitholders in a meeting that is expected to occur in mid to late December. The board of directors has unanimously approved the agreement and will vote in its favour. The deal is also subject to court and regulatory approval.

KNOC will pay for the deal with a combination of cash reserves and debt. It has been reported that it could issue bonds to finance the deal, which would be in line with recent behaviour; in July the company sold $1 billion worth of five-year notes.

"The potential significant increase in debt resulting from this sizeable acquisition is balanced by KNOC's continued good access to financing and government on-going funding support," Renee Lam, Moody's lead analyst for KNOC, said in a research note yesterday.

Harvest is taking financial advice from TD Securities, while Bank of America Merrill Lynch is acting as sole advisor to KNOC.