Yield investors begin to make presence felt in SPAC
Reach Energy Bhd managing director Shahrul Hamid Mohd Ismail is well aware but not surprised on the ongoing tussle between yield seekers and long-term investors in special-purpose acquisition companies (SPACs).
It is clearly a war between the these two groups of investors that is played out at shareholders meetings of SPACs.
The latest episode of this ongoing battle saw yield investors trumping long-term shareholders at the recently held EGM of oil and gas SPAC, Sona Petroleum Bhd. The yield investors won the battle after voting down the proposed qualifying acquisition (QA) of Sona.
Shahrul Hamid is hoping that the investors in Reach Energy would understand the purpose of SPACs.
“I hope investors can see what are the original reasons the SPACs were introduced in the first place. These were real genuine reasons to give investors a chance (to buy) into an asset. We hope that we will not be in any agenda (by shareholders),” Shahrul Hamid says.
On the face of it, Reach Energy seems to be in a similar quandry as other oil and gas SPACs such as Sona. This is because the industry as a whole is still recovering from the steep drop in global oil prices.
There are market observers who also believe that Reach Energy is in a better position than its peers to manoeuvre this battle between the yield and long-term investors and that there is a higher possibility of the outcome going the way of long-term investors, whose interests are to see the QA being approved.
SPACs will need to obtain the approval of shareholders representing at least 75% of its issued shares. This means that for every one person who reject the QA, they need three to accept the asset.
Although it is still unknown at this juncture on what the voting commitments of Reach Energy’s shareholders are, sources say the presence of yield seekers is still within “manageable” situation.
“We see there are several names that could be identified as yield seekers, but there are also a huge chunk of shareholders that can be classified as long-term shareholders,” says a source.
However, whether this really is the case for Reach Energy will need to be scrutinised further.
A glance at Bloomberg data shows that Reach Energy’s shareholders who are believed to be yield seekers, Credit Suisse and Pacific Alliance, still have a small position in the company. Both add up to about 6.5% stake in Reach Energy.
Another substantial shareholder is Datuk Azmil Khalili Khalid and his wife Datin Nik Fuziah Nik Hussein of MTD Capital. At the last count, MTD Capital holds 7.04%.
There are also substantial institutional investors such as Lembaga Tabung Haji, Kumpulan Wang Persaraan and Norway’s Norges Bank Investment Management as Reach Energy’s shareholders. These three shareholders add up to some 8% stake in Reach Energy.
It is believed that these instititional shareholders are long term in nature and will vote the QA through, depending on the value that it brings to the table.
However, Pacific Alliance and MTD Capital have been constantly buying Reach Energy shares from the market and have a far more bigger equity compared to the institutional funds.
“As of now, Pacific Alliance and MTD Capital already have a stake of close to 13.5%. If they reach the 20% mark, it would be a difficult situation for Reach Energy unless it can buy them out or convince them of the asset,” says an observer.
Sources say that certain yield investors have also spoken to management of Reach Energy and they appeared “reasonable” with their requests.
“If Reach Energy can get a reputable oil company as a shareholder in the SPAC, some of the yield investors say this will be a reason for them to vote the deal through,” says a source.
“Alternatively, Reach Energy would need a ‘godfather’ to help buy out the dissenting shareholders.”
Reach Energy a different animal?
But compared with the dilemma that is faced by Sona and CLIQ Energy Bhd, Reach Energy has several advantages at its end for now.
The market has not fully discounted that Reach Energy has the luxury of time on its side, as the company has more than a year to complete its QA.
This implies that if shareholders of Reach Energy were to vote down the QA, they will still have to wait for more than a year to get their cash portion back.
This time lag would significantly reduce the yield on the returns that yield players are looking for.
Furthermore, it has to be noted that unlike Sona’s asset, Reach Energy’s asset is producing at an early stage ahead of its long life under a 20-year concession with production build-up from confirmed reserves.
“This is an asset for serious E&P (exploration and production) investors interested in the value growth of Reach Energy’s stock if oil prices improve,” says an observer.
But Reach Energy has yet to get the necessary approvals from the authorities.
Then there is also the case of Hibiscus Petroleum Bhd that did not face any issues in its QA.
It is to be noted that almost all of Hibiscus’ shareholders (99%) had voted in favour of its QA then.
This sentiment was reflected in Hibiscus’ share price that was trading at more than 30% above its cash value indicative that shareholders will vote through for the QA even before the EGM.
Hibiscus also had the support of some deep pocket investors, including Tan Sri A.P. Arumugam that held up to an 8.8% stake in the company in March 2012.
At this juncture, Reach Energy’s management will need to figure out a way to reach out to long-term investors to increase their stake in the company so that the decision-making clout does not go to the hands of yield investors.
For this to happen, the price of the stock will have to increase so that it will no longer be attractive for these yield players to continue increasing their stake.