Merger Arbitrage (at 12.5p)
This idea was shared by Jerry.
Sintana Energy is acquiring Challenger Energy at an exchange ratio of 0.4705x. It’s a minuscule cross-border merger between two junior O&G explorers. Closing is expected by the end of the year. The headline spread currently sits at 20%, though after factoring in bid/ask slippage, the more realistic and actionable spread is around 15%. Hedging looks easy with plentiful and cheap Sintana borrow on both TSX Venture and OTC listings.
The spread probably exists as this is an obscure cross-border merger that almost no one is watching. Challenger is a £30m market cap company listed on London’s AIM, trading at a £40k–70k daily volume. Sintana, while 4 times larger, is listed on Toronto’s Venture Exchange and has an equally thin trading volume.
Both companies hold minority interests in early-stage exploration projects. Challenger Energy has two offshore oil and gas licences in Uruguay. Both areas are still in the pre-drilling phase and focused on seismic data gathering. In one of these areas, Challenger owns a 40% non-operating interest, while Chevron holds the remaining 60% and acts as operator. Chevron is funding the seismic campaign, after which drilling and initial exploration costs will be shared equally. Challenger holds a 100% operating interest in the second licence.
Sintana Energy’s portfolio spans 7 onshore and offshore licences across Namibia and Angola, though the interest it holds in these assets are very small, in the range of 5–16%. These projects are also in the very early stages. In most of them, Sintana is carried through near-term exploration by the larger partners, limiting its immediate capital commitments. Those partners include industry heavyweights such as Chevron and ExxonMobil.
The merger appears to be orchestrated by a mutual shareholder, Charlestown Capital Advisors, a New York–based hedge fund. Charlestown owns 5.9% of Sintana Energy and effectively runs the company: the principal of Charlestown serves as Sintana’s CEO.The fund has been providing financial support to Sintana for several years, first through private placement of common stock in 2021 and later a C$1.5m convertible note issued in 2024 (since converted). Most recently, it agreed to provide a new US$4m financing facility. So it will become not only a major shareholder but a debt holder as well. Charlestown also controls one board seat and owns 3.8% of Challenger Energy. In essence, this is a PE firm merging two of its own portfolio holdings. The buyer knows exactly what it’s getting, so there’s little reason to expect any unwelcome surprises.
This marks Sintana’s largest acquisition to date. Until now, the company had mainly been acquiring small equity stakes in various exploration projects, typically worth only a few million dollars. Its last notable transaction was in 2021, when it acquired assets in Namibia for around C$10m.
Shareholder vote should pass easily. 34% of Challenger’s shareholders have already agreed to vote in favour of the transaction. The merger will require approval from 75% of votes cast. The meeting date has been set to November 26. Sintana shareholder approval won’t be needed.
Other key conditions are also likely to be met:
- Regulatory approval from Uruguayan ANCAP (National Administration of Fuels, Alcohols and Portland). This relates to the transfer of ownership of Challenger’s licences, and there’s little reason to expect any regulatory complications. One of the assets, Area OFF-1, is a 40% non-operating minority interest, while the other asset, Area OFF-3 (which is fully owned), is still at a very early stage. Challenger’s management has always indicated that OFF-3 would eventually be farmed out, which means partially divested in exchange for a partner taking on operating obligations (see quote from the annual report below). The company applied the same model with Area OFF-1 in 2024, when it farmed out the 60% operating stake to Chevron. Given it has always been clear that the operating partner for OFF-3 would eventually change (since Challenger lacks the capacity to fund the work itself) and that Sintana will likely pursue the same strategy post-acquisition rather than finance the development directly, it’s hard to see why Uruguayan regulators would have any reason to object to the merger.
The technical work on AREA OFF-3 continues to progress as planned and the Company anticipates results of that work in Q3 2025, enabling us to commence a farmout process on that block.
- Chevron consent. Approval is required under Challenger’s joint operating agreement with Chevron for the Area OFF-1. This should be a formality only. Sintana already partners with Chevron on several other projects.
So the merger does look very likely to close this year.
As for the risks, the downside to pre-announcement levels appears limited, though these are tiny junior explorers, so there could be some volatility if the merger were to fall through. For now, there’s ample borrow available for hedging at around a 4% fee, though the effective cost is higher, as fees are charged on a per-dollar basis and Sintana trades below C$1. Borrow availability could tighten and fees could increase going forwards, given that Sintana will be issuing roughly 25% of its equity (126m new shares).
Can you show how you derived the 15% upside at 12.5p?
With TSXV:SEI at .56 CAD, a .4705 ratio, and 1.847 GBP/CAD exchange rate I get 9.4%. I also don’t see how the presentation got 16.61 from .66 and 1.87 exchange rate, so maybe I am missing something
Not the most liquid stocks tbh, prices jump around a fair bit and the spread’s tightened now. I’ve used C$0.54 for SEI.V and £0.12 for CEG.L. CEG’s ask is usually around £0.125, but loads of trades go through below £0.12. Just needs a bit of patience to get filled. Guess dt just wrote the headline ask price for that part.
Sintana retail shareholders (myself included) are not happy about this transaction. Sintana’s share price has been punished for a variety of reasons, most of which have nothing to do with the underlying value of the company. With Galp’s farmout of the 10 billion barrel OOIP discovery, Mopane, scheduled to to be announced by yearend, the value of Sintana’s 4.9% carried interest will be difficult to ignore and the stock should get a rerate. That asset alone is easily worth US$250 million. ($2.50/bbl assuming 2 billion recoverable, both extreme low assumptions). Multiple news stories have pegged the value of Mopane at $10-$20 billion which equates to a Sintana Share price of $1.30 to $2.60, multiples of the current share price. And this is just for Mopane. Sintana also has valuable other blocks including 7.5% of the enormous prospect in PEL 87 which could be farmed out at any time by Pancontinental.
So why is Sintana paying full value for Challenger when its own stock is so undervalued? Two answers. The first is that there is some merit to the deal: diversification, UK listing, synergies, greater investor interest. But the more sinister reason is that Sintana and it’s largest shareholder Charleston are hopelessly conflicted having interests in both companies. The conflicted parties claim to have recused themselves from the negotiations but this is hard to reconcile given the timeline and the huge overlap in management and insider shareholdings. They have selling Sintana and buying Challenger, and Challenger stock started to rise back in July just as private negotiations between the two companies began.
The deal will probably close, but it is a wretched one; the exchange ratio is ridiculous. But I’ve bought a few CEG shares to lower my Sintana cost basis assuming the deal will close.
What shares of Sintana will be provided for Challenger shareholders? Shares on TXE? In that case it is more interesting to short Sintana shares on TXE, so that the short position would collapse after the deal is closed, right?
Yes, they will receive the shares listed on the Toronto Venture Exchange (SEI.V).
From how I read it CEG holders get Sintana shares traded on the AIM:
“As part of the acquisition, Sintana intends to seek a dual listing and admission of Sintana shares to trading on AIM, in addition to continuing to trade on TSXV in Canada and OTCQB in the United States, allowing CEG shareholders to continue to hold and trade the new Sintana shares via AIM”
You might be right. Judging by the provided timetable, the companies expect Sintana shares to be distributed to CEG shareholders after the dual listing occurs. That said, based on the press release language, there’s a chance the dual listing is not secured (likely a low probability) or that there are delays in obtaining the AIM listing.
https://www.globenewswire.com/news-release/2025/11/03/3178875/0/en/Sintana-Energy-Inc-Announces-Publication-of-Scheme-Document-in-Connection-with-Acquisition-of-Challenger-Energy-Group-plc.html
I am guessing they will likely give CEG shareholders election options for shares listed on Toronto or London.
If any of the 34% shareholders supporting the merger is in it for an exit, he likely has pushed Sintana for the more much liquid Toronto shares.
In any case, I think one can pay a fee to his broker to convert one to the other.
Questions for Jerry:
Why do you think a London AIM listing is attractive to Sintana Energy. I thought the shareholder base in Canada or Australia is more friendly to energy/resources small caps. Even if we judge just by the trading liquidity, Toronto will be much better than London for Sintana.
Also a question re borrow fee, are the fees on SEUSF also charged on a per-dollar basis?
You might be right, but I guess one of the reasons Sintana is pursuing an AIM listing is for the benefit of current CEG shareholders, so they are not stuck holding a Canadian stock. The AIM listing might have been accepted by Sintana to help push the shareholder vote over the line. FWIW, Charlestown (owns stakes in both companies) has committed to a $4m working capital facility, which appears to be conditional on Sintana’s AIM listing, judging by the merger PR.
Regarding borrow fees, borrow fees for US OTC equities are charged on a per-dollar basis.
@Jerry do you have a source for the rules that borrow fees are charged on a per-dollar basis for OTC stocks and Canadian stocks below C$1?
At least for Interactive Brokers the borrow fees are charged based on actual dollar value (i.e. stocks traded at $0.5/share won’t be rounded up to $1/share when the borrow fees are calculated) .
Or maybe I misunderstood what you said?
See below from IBKR docs:
“In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is to require a deposit equal to 102% of the prior day’s settlement price, rounded up to the nearest whole dollar and then multiplied times the number of shared borrowed. As borrow rates are determined based on the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares.”
https://www.ibkrguides.com/kb/en-us/article-1146.htm
@Jerry Thank you very much! I didn’t know about this.
North American markets (US and Canada) seem to have some very odd and out-of-date traditions and it’s very difficult to reform/modernize them. Just 8 years ago US markets were still running on a t+3 settlement cycle.
The Scheme document states that “the last day of dealings in Challenger Shares on AIM is expected to take place on 10 December 2025”.
Can we rely on this timetable? Or will the closing effective date most likely be extended because with less than two weeks left they haven’t received regulatory approval from Uruguayan ANCAP.
I guess the closing date will be extended if ANCAP consent is not received by then. But there’s also a chance the transaction could be terminated immediately if the ANCAP condition is not satisfied — see the excerpt from the merger press release below:
“Given the material importance of Challenger’s assets in the context of the Acquisition, and the ANCAP Consent in that regard, Challenger Shareholders should be aware that, if the ANCAP Condition is not satisfied, it would be Sintana’s intention to seek the Panel’s consent to invoke the ANCAP Condition to cause the Acquisition to lapse.”
If ANCAP hasn’t delivered its verdict by 10 Dec, I think Sintana must continue to work with Challenger to obtain the consent until the long stop date of 30 June 2026.
“Sintana and Challenger have entered into certain customary commitments to provide information and assistance to the other for the purposes of assisting with the satisfaction of the ANCAP Consent as soon as reasonably practicable and, in any event, to enable the Acquisition to complete before the Long-stop Date;”
Forgive the rookie comment here… but where is the £0.12 price coming from? The LSE page for the company lists their stock price at £13…
Prices on the LSE are quoted in pence, so 13p is equivalent to £0.13/share.
Well then, I learned something today. Thanks. (I get the 13p being £0.13 – I’m British), but didn’t get the 13.00 display, thinking it was pounds.
Regulatory approval from Uruguay’s ANCAP has been secured. The merger is expected to close on December 16th. The spread has already closed. The idea has played out well.
While I see a jump in price for the US OTC market (OTC:BSHPF up 11.5% today to $0.165), I’m still seeing 11p for buying on Fidelity and 11.44 on Yahoo Finance (https://finance.yahoo.com/quote/CEG.L/)… is it worth trying to grab some tomorrow, or are we expecting a similar price jump on open there?
Maybe it’s just wide bid-ask spread, or time zone difference, CEG seems to have been trading at a >7% premium to the expected merger consideration.
London-listed SEI shares have been received.
On the first day of dealing, there was virtually no trading liquidity at all.
Volume was 105,809 shares but less than 10 shares was on-book.
Is there any way to convert the London shares to TSX shares?