14 August, 2016
Summary
Often a target company asset may have a value that depends on future events. That may make it hard to agree on acquisition terms.
The rival proposals for InterOil Corporation (InterOil) show two different ways of dealing with this issue, which, in this case, arises due to a potential future payment contingent on the certification of InterOil's interest in PRL15 in PNG's Elk-Antelope field.
In this article, we examine the key features of the contingent value right (CVR) of Oil Search and the cash contingent resources payment proposed by ExxonMobil.
InterOil Corporation is currently the subject of competing acquisition proposals from Oil Search Limited and ExxonMobil.
The consideration offered by both bidders provides contrasting examples of how additional consideration payable on a contingency may be part of an acquisition structure.
Under both proposals, the contingent consideration is payable depending on the results of an independent resource certification of the volume of InterOil's PRL15 resource in PNG. But the method for achieving this outcome differ markedly between the two proposals.
The Oil Search proposal
On 20 May 2016, Oil Search and InterOil announced that Oil Search would acquire 100% of InterOil via a Canadian plan of arrangement. The proposed consideration was 8.05 Oil Search shares for each InterOil share held, plus one CVR (contingent value right). InterOil shareholders could also elect to take a cash alternative for the Oil Search scrip component, up to a maximum cap of US$770 million.
The CVRs would entitle holders to a contingent cash payment linked to the volume of 2C hydrocarbon gas resource certified to be contained in the Elk-Antelope fields. This essentially mirrors the payment regime under an agreement between InterOil and Total, under which Total is required to pay InterOil if the independent certification determines the 2C resource of the field to be above 6.2 tcfe.
The CVR was proposed to be structured as a debenture, governed by a CVR Note Deed. The CVRs would be redeemed in full and the redemption payment paid in cash upon completion of the certification process. On redemption, each CVR will deliver approximately US$6.05 for each tcfe above 6.2 tcfe gross.
Several protections for noteholders were built into the deal, including the establishment of a subcommittee to supervise the independent certification and security over the bank account that will receive the payment from Total.
The CVRs were accepted by ASX as suitable for listing. If the proposal is successful, this will be the first CVR to be listed in Australia as a debt instrument.
The ExxonMobil proposal
On 18 July 2016, the board of InterOil determined that that a rival proposal from ExxonMobil constituted a ‘superior proposal’ to the Oil Search proposal.
Under the terms of the ExxonMobil offer, for each IOC share held InterOil shareholders would receive:
- ExxonMobil shares to a value of US$45 (the exact number of ExxonMobil shares to be issued would be calculated based on a 10-day VWAP leading up to the closing date); and
- a cash contingent resource payment of approximately $7.07 per IOC share for each tcfe gross resource certification of the Elk-Antelope field above 6.2 tcfe, up to a maximum of 10 tcfe. This right would not be transferable and would not be listed on an exchange.
At the time of writing, Oil Search has a 3-day matching period during which it can offer to amend the terms of the arrangement agreement between InterOil and Oil Search.
Commentary
The Oil Search proposal represents an interesting development in the use of CVRs in Australian M&A. If it proceeds, it will be the first CVRs structured as a debt instrument to be listed on ASX.
In Australia, we have previously only seen two listed CVRs used in M&A transactions: Wesfarmers' acquisition of Coles and Yancoal Australia's acquisition of Gloucester Coal. Both of those CVRs were structured as special shares in the acquiring entity which gave the holder the right to an issue of further shares (in the case of Wesfarmers/Coles) or a cash payment (in the case of Yancoal/Gloucester) if the ordinary share price of the acquirer fell below specified benchmarks.
The infrequent use of CVRs in Australia can be contrasted to the numerous examples in the US. This includes:
- Community Health Systems' acquisition of Health Management Associates in 2014, where CVRs relating to the outcome of litigation were listed on NYSE;
- Atlas Copco's acquisition of Edwards Group in 2013, where CVRs were listed on NASDAQ which entitled holders to payment if certain revenue and EBITDA targets were met;
- Cubist Pharmaceuticals’ acquisition of Optimer Pharmaceuticals in 2013 where CVRs were listed on NASDAQ that entitled holders to payments (up to a maximum cap) if certain sales targets were reached;
- Wright Medical Group, Inc.’s acquisition of BioMimetic Therapeutics, Inc. in 2012 where CVRs dependent on FDA approval were listed on NASDAQ; and
- Sanofi-Aventis’ acquisition of Genzyme Corp in 2011 where a CVR was listed on NASDAQ that entitled holders to payment if a multiple sclerosis drug developed by the target was approved by regulators and certain product sales and milestones were met.
Structuring the CVR as a debt instrument provides a clean and simple security for holders. There will be only one payment made in the life of the security and the CVRs will be redeemed after the contingent event has occurred. This more accurately reflects a contingent payment and is consistent with the concept of a control transaction providing an exit for target shareholders.
The ExxonMobil proposal has a very different approach. In many respects it is simpler and does not allow for trading of the rights, nor does it appear there is a trustee or other arrangements to secure the payment. That possibly reflects the huge size of ExxonMobil.
It is too early to be confident about the outcome of the rival proposals, but we consider that the Oil Search CVR proposals is a good reminder of the flexibility that can be built into the structure of an offer.
We expect to see more listed CVRs utilised in takeover transactions in the future. Now that ASX has demonstrated a willingness to list these securities, practitioners should consider CVRs as a genuine option for deal consideration, particularly where a target has an uncertain, but possibly substantial, future payment on the horizon.
For further information, please contact:
Rodd Levy, Partner, Herbert Smith Freehills
rodd.levy@hsf.com
