Liquefied Natural Gas (LNG.ASX) – Merger Arbitrage – 48% Upside

Current Price: A$0.135

Offer price: A$0.20

Upside: 48%

Expiration date: TBD

Press release

This idea was shared by Duncan.

 

North American LNG project developer Liquefied Natural Gas (LNGL) has agreed to merge with Singaporean private LNG related services company LNG9. The price is set at US$0.13 (~A$0.20) per LNG share. Conditions include a blessing from CFIUS and possibly Aussie foreign investment regulator (FIRB) as LNGL is incorporated in Australia. 90% of LNG shareholder acceptance. Current 48% spread implies that there are significant risks, as I understand, mostly related to the shareholder acceptance condition. Offer document is expected to be dispatched later this month or in April, so currently there is not much information available.

LNGL is currently trading around the pre-annoucement levels (all time lows), so the downside would likely be minimal.

The deal comes just a few days after the management has acknowledged the immediate need for financing and evaluation of strategic options. Management is urging shareholders to accept the proposal to avoid further dillution and possible liquidation as the cash reserves of the company will allow it to continue operations only until Q4 2020 (would've been this month, but LNGL has just managed to raise $6m). Moreover, the management states that due to competition and oversupply in the industry, the chances of LNGL share price increase in short/medium term are slim.

 

LNGL 

The company develops two projects in North America:

  • 8 mtpa LNG terminal (turning gas into liquid) Magnolia LNG, which is located in Louisiana, US. All of the required regulatory approvals have been received back in 2016, while the gas supply agreement has also been signed. Nonetheless, the biggest problem is that in more than 3 years the company did not manage to sign binding contracts with buyers, that are needed in order to get the financing for the project. Contracts for nearly all of the 8 mtpa are required. . In September'19 it has entered into preliminary discussions with Delta Offshore Energy for 2mtpa/year LNG supply for the the Delta's backed plant in Vietnam. However, a binding contract is yet to be materialized (until May 31st), while one of the conditions to closing the agreement is that LNGL should gather the required financing for Magnolia before the 31st of August'20.
  • 8 mpta LNG terminal Bear Head, located in Nova Scotia, Canada. This terminal is still in a bit earlier stages than Magnolia. It has collected all the needed regulatory requirements, however it still in the process of signing the gas supply contract for its LNG exports.

So the company has been struggling to raise the financing for Magnolia for at least 5 years now, which has resulted in significant dillution and value destruction for the shareholders.

Shareholder base is quite concentrated, although there are no holders that can block the deal singlehandedly:

LNGL

 

 

2 COMMENTS

  1. Ilja

    After the 7 days long trading halt LNGL has issued an updated stating that the $6m funding got cancelled and now the company has enough cash to continue operations only until the end of April’20. LNG9 said that they will work together to arrange new funding.

    The merger appears to be still on and the offer document is expected to be dispatched in April. Current upside stands at 2.7x.

  2. Ilja

    Overall, given the current situation of LNG it seems quite unlikely that the buyer will be willing to proceed with the acquisition. The idea is closed with -40% in 1 month.

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