PTTEP starts bidding war for Cove Energy

PTTEP has made an audacious bid to secure a foothold in the fast-growing African market by making a 220p a share offer for London-listed Cove Energy.

The bid tops a rival offer from Shell by 13% and values Cove Energy at £1.1 billion ($1.7 billion). However, analysts reckon it is still not a knock-out bid, particularly if cash-rich Shell has its heart set on buying Cove.

Even so, PTTEP — and its advisers at UBS — said the offer is 134% above Cove’s 94p share price on December 12, which was the last business day before the company opened its data room. The offer is also 96% higher than where Cove traded before the sale process was announced on January 4. However, in pure cash terms it is only $100 million more than where Shell’s first bid came in. With Cove’s share price rising to 237p by the close of business on Friday, the market is clearly expecting a counter bid.

That a Thai company should be in a position to make an all-cash bid for an African energy company should not be a surprise. The company has grown strongly in recent years and now has a market cap of some $19 billion. In 2011, it paid $2.3 billion for a 40% stake in the Kai Kos Dehseh Oil Sands Project in Canada from Statoil. Moreover, the company has a strong national interest in securing energy supplies as Thailand is a net energy importer. Cove’s key asset in this regard is its 8.5% participating interest in the Mozambique Rovuma Offshore Area 1 block, which has an estimated 30-60 trillion cubic feet of natural gas. Its majority rights holder is Andarko Petroleum.

East Africa is one of the most promising natural gas provinces in the world and its proximity to Asia makes it naturally appealing to a company such as PTTEP, which is at pains to point out that if it wins it will make significant investments in Mozambique’s domestic LNG infrastructure to get the gas to market — even if this deal actually represents the acquisition of shares in a UK-listed company.

PTTEP is 65%-owned by state-controlled PTT and it is financing the proposed bid through “existing resources and available facilities”. It was reported on January 30 that the company had launched syndication for a $500 million loan facility. Alongside UBS as financial adviser are Brunswick as financial PR adviser and Slaughter and May as legal adviser. Cove Energy is being advised by Standard Chartered.

If successful, it will be the latest deal in a growing trend of Asian investment into Africa. Last week it was announced that the Benny Steinmetz group is looking to list a diamond mine in Sierra Leone on the Hong Kong stock exchange. Last year, Essar Group announced a $4 billion investment into the Zimbabwean national iron and steel company. But to win, PTTEP will have to overcome some deep-pocketed rivals that are well connected to Cove. In particular, Cove Energy’s executive chairman, Michael Blaha, worked for Shell for 29 years, in various hotspots around the world. His most recent role was as chairman of Shell Algeria, but he also had stints with the company in Sakhalin, Iran and Syria.

But before investors get carried away with the returns, they should cast a wary eye at an another Mozambique deal that has gone spectacularly wrong. Pathfinder Minerals, like Cove Energy, is a London-listed vehicle containing rights to resources in Mozambique, in this case mining rights for rare minerals such as ilmenite, rutile and zircon.

The UK company claims that late last year, a retired army officer and government minister called General Veloso had Pathfinder’s licences to the mines struck off the central register at the Ministry of Mineral Resources and had them reissued in the name of Pathfinder Mozambique SA, which is no relation to the UK company. Sources close to the situation say that government collusion in this expropriation is self-evident and the case is now being handled at a governmental level. Indeed, the case has caused great concern in China, which is the natural market for such rare minerals, and representations have been made to that effect.

That a bidding war is emerging for other areas of Mozambique’s resource wealth while such a situation is in play may cause investors to increase the risk premium they attach to Cove Energy deal.