Current Price – A$0.135
Acquisition Price – A$0.15
Upside – 11%
Expiration Date – Nov 26th 2018
This idea was shared by Neo.
Kangaroo Resources (KRL), listed on the ASX, is an Australian company with portfolio of coal development and exploration assets in East Kalimantan Indonesia. On 17 Aug 2018, Kangaroo Resources announced that it had entered into a binding agreement with its controlling shareholder, PT Bayan (who owns ~56%) under which PT Bayan will buy out minority shareholders at A$0.15 per share.
Transaction is subject to approval of 75% of minority shareholders. Meeting is is scheduled for Nov 26 with the implementation expected on Dec 11 if things progress smoothly.
The offer price of $0.15 represents a 600%+ to unaffected price of $0.0297 preceding 8 May 2018, when it was first announced that PT Bayan was considering the acquisition. Therefore, if the deal fails, downside is material.
The buyer and deal rationale
The buyer, T Bayan, is an integrated coal group, primarily engaged in open cut coal mining in East and South Kalimantan, listed on the Indonesian Stock Exchange (A$6bn market cap vs A$0.5bn for KLR). Bayan established controlling stake in Kangaroo back in 2011 after selling mining project to it in exchange for shares. The currently proposed cash out per share price is approximately the same where Kangaroo was trading in 2010-2011 when the initial asset/share swap was agreed.
A large portion of Kangaroo assets are in close proximity to the existing coal mining and infrastructure assets of PT Bayan and KRL is dependent on Bayan services for its operations. More importantly, Bayan acts as project manager and developer for all of Kangaroo assets already.
According to PT Bayan, the rationale for the acquisition is to consolidate Kangaroo Resources operations with PT Bayan's Indonesian operations, which would present opportunities for synergies. However, this does not sound as very credible statement as all the Kangaroo are already fully managed by the Bayan. A more likely explanation is that Kangaroo revenues have recently started to ramp-up meaningfully (A$6m in H1 2018 vs A$0.04m in H1 2017) and Bayan is best positioned to know the true value of these assets. Therefore, Bayan might simply want to keep any expected upside fully for itself rather than share it with minority investors. However, revenues and profits would need to continue to increases substantially to justify the purchase price.
It is still a bit puzzling why Bayan needed to offer such a large premium, especially keeping in mind that it has been keeping Kangaroo on life support for the past couple of years. However, valuation exercise performed by KPMG indicates fair value of A$0.12-A$0.16 per share and even shows Kangaroo as undervalued relative to listed peers and transaction on EV/Reserves and EV/Resource multiples (see pages 87-97).
PT Bayan expects that 40% of the total purchase price would be funded through its cash reserves, while the remaining 60% would be funded through its existing available debt facilities. So financing does not seem to be an issue.
Risks and reasons's for spread
- Material downside (likely almost 100%) is the deal breaks.
- 75% approval requirement should not be problematic keeping mind large premium to the traded share price as well as no large shareholders outside Bayan (all the rest above 1% seem to be bank nominees).
- Risk of Bayan walking away. The founder and primary and controlling shareholder of the PT Bayan Group, Dr. Low Tuck Kwong, recently walked away from making a $10.8m investment for 19.8% of Gulf Manganese, another ASX listed company, due to uncertainty arising from a moratorium called by the new Governor of the Province of East Nusa Tenggara. However, I do not think this will have a direct impact on the Kangaroo Resource transaction as the company doesn’t operate in that area. Also worth noting that Low Tuck Kwong has increased his own stake in Bayan by buying out Enel last year.
- Also the risk of Bayan walking away is minimized by the fact that they are already operating all the assets in question and have good understanding of their value.