Shell Backs Out of the Race to Acquire Cove Energy

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In a move totally unexpected by investors today, Royal Dutch Shell (LSE:RDSA) (LSE:RDSB) backed out of a bidding war against its rival, Thailand’s PTT Exploration & Production (PTTEP), to take over Cove Energy (LSE:COV).

In a statement released an hour before London closed trading, Shell said “it will not take part in the Auction Procedure for Cove” and will stick with the 220-pence cash offer, which priced Cove Energy at £1.120 billion.

Shell’s offer equalled PTTEP’s bid two days after the Dutch oil and gas producer’s original 195-pence per share proposal was submitted to Cove, later trumped by PTTEP’s 240-pence per share on 23rd May 2012 that valued Cove at £1.22 billion.

The investors hope of a counter-offer smoked away after Shell’s statement, making Cove Energy’s share price lose 37.50 pence, or 13.6%, at the close of trading on the London Stock Exchange, to just 2 pence short of the currently standing offer, at 238 pence.

Change of Heart

As the bidding war dragged on in its sixth month with either party not declaring their offer final, according to the UK Takeover Panel, the British watchdog ruled on Friday, 13th July 2012, to hold an auction procedure if a “competitive situation” will continue to exist.

Earlier today, PTTEP has issued its third extension of its intent to acquire Cove Energy giving another deadline of 25th July 2012 for shareholders to accept the offer.

Shell had already declared it was extending its offer on the same day, also its third, in a statement released on 12th July 2012.

Cove’s Board of Directors had originally intended to “recommend unanimously” Shell’s offer back in April, with about 3.27% of the issued share the AIM-quoted upstream oil and gas explorer declaring irrevocable undertakings.

PTTEP, on the other hand, has received valid acceptances of its offer equivalent to 0.25% of Cove’s issued capital stock, as well as the loyalty of the Board, which declared it will recommend Thailand’s publicly listed national oil and gas exploration and production company.

It was previously held by analysts that Shell will be the favoured one, given its size and position as the leading supplier of natural gas in the world compared to PTTEP, whose intention is to secure supply of gas in Thailand.

Shareholders of Cove Energy is now left with the choice to either accept or decline PTTEP’s terms in the absence of a new bidder.

The Stake

Shell and PTTEP were fighting to control Cove Energy’s 8.5% stake in the largest gas discovery to date, located off the coast of Mozambique in Africa, where the latest count is now estimated to be at around 100 trillion cubic feet of gas.

Cove Energy also has interest in the Mnazi Bay Concession in Tanzania, to be purchased by Wentworth Resources Limited (LSE:WRL) for US$38.8 million plus two million shares in Wentworth.

The acquisition of Cove Energy was hailed by analysts as Shell’s entry to the lucrative and highly prospective East African region, in its quest to secure dominance in the LNG market.

The abandoned bid has made analysts speculate Shell may be dealing with other players in the region, including Anadarko, which operates the Rovuma 1 Block where Cove Energy has 8.5% interest.

Shell stated the decision to back out was “based on the market valuation and economic potential of Cove’s assets”, The Telegraph reported.

Both A and B shares of Shell gained 0.41% and 0.33%, respectively, or £22.13 and £23, at the close of trading in London, following the announcement.

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