Event Trade: Pacific Energy (PEA:ASX)
8 Nov 2019
By Shannon Rivkin
The PEA Event trade was first recommended as a buy on 24 July 2019. Below are each of the updates related to this trade in chronological order.
Current advice: Await Payment
Update – 08 November 2019, 03:43pm
We had the scheme meeting for PEA and, as expected, the deal was overwhelmingly supported by shareholders. While it still requires federal court approval, the shareholder vote is effectively the last condition of note.
PEA has worked out even better for shareholders, with members due to receive a $1.005 capital payment as well as a $0.065 special dividend on top. Members already received a $0.015 final dividend, so gross proceeds will total $1.12 which is a 14.9% return from our entry price of $0.975 in August.
PEA shares will cease trading on 18 November with payment due on 2 December.
Update – 29 October 2019, 10:01am
Things have gone very quiet on the PEA front, with no news from OPTrust since its attempts to muscle in on PEA saw original bidder QIC raise its own offer. We’re pretty surprised considering QIC really only beat its price by a measly 0.5c but it’s always possible OPTrust offered its best price. With the scheme meeting fast approaching, the odds of OPTrust re-emerging are pretty low but buying in at or below the offer price of $1.07 (or $1.075 if PEA is able to avoid paying the break fee to OPTrust) offers us no downside if we see no action.
It is important to note that anyone buying PEA now will no longer qualify for the franking credits as our holding time will be less than 45 days, so anyone buying the stock now should be doing so on the slim hope we see OPTrust come back to the table. With almost no risk the current offer falls over, PEA certainly remains a decent parking spot while we wait out the last few weeks of the investment.
In the meantime, we remind members to get in their votes for the deal with the scheme meeting fast approaching on 8 November.
Update – 09 October 2019, 10:54am
Members should this week begin receiving their Scheme Booklets for the acquisition by QIC. We have been hoping to see OPTrust re-emerge back into the picture but in the absence of further action we recommend members support the current offer.
The Scheme Meeting is due to be held on 8 November with votes due in before 6 November. The easiest way to vote is to visit www.investorvote.com.au and you will need the details provided on your proxy form. We recommend voting ‘FOR’ all proposed resolutions, and between now and 8 November we will keep our fingers crossed that we see a new offer.
Update – 23 September 2019, 11:14am
PEA has shed a $0.015 fully franked dividend, which has led us to reduce our buy recommendation to $1.075 to account for this. Things have gone quiet from OPTrust but until we hear word that it has walked away we remain hopeful of further bids.
Update – 16 September 2019, 10:26am
Further to our update on PEA on Friday, the company announced on Friday afternoon that QIC matched the offer made by OPTrust as part of the process articulated in the Scheme Implementation Agreement (SIA) signed between the two companies. This is great news as we now have two big investors with deep pockets fighting over an asset with strategic value.
Additionally, QIC has thrown an extra $0.005 into its offer to ensure that PEA does not sign an SIA with OPTrust which would see OPTrust be entitled to a $2.5m break fee if a deal does not complete. And PEA has this morning thrown its support behind the new $1.09 offer due to the slightly increased price and shorter time frame.
So, where to from here? OPTrust’s offer was subject to acceptance by midday of the 17 September, but with a higher offer from QIC that deadline will obviously pass now. But until OPTrust declares its intent to walk away, it is too early to call QIC the winner just yet.
So, we remain happy holders for the moment and continue to recommend members who have yet to buy the stock to do so up to a price of $1.09 per share.
Update – 13 September 2019, 11:00am
PEA is in another trading halt this morning as we still await a response from QIC to the new offer from OPTrust. We don’t expect to see an announcement till Monday so all we can do is hope that we see QIC re-enter the picture.
Update – 10 September 2019, 01:47pm
Further to this morning’s update on PEA, we have learned that the company has this afternoon signed a new deal with OPTrust whereby shareholders will receive a total of $1.085 per share. This includes total fully franked dividends of $0.08 per share – adding $0.034 per share in franking credits – and is a premium to our buy price of $0.975 of 14.8% (including franking).
This is great news for shareholders and the ball is now back in QIC’s court as they have a matching right under the agreement it signed. Given the possibility of more bids, as well as the value of the franking credits, we are happy for members to buy PEA at $1.085 or below. The stock resumes trading this afternoon at 2.09pm.
Update – 10 September 2019, 11:17am
Members bought into PEA in late July after it signed a deal with QIC which would see QIC buy PEA for a total of $0.975 (including a $0.015 fully franked dividend). At the time, we thought there was a possibility that OPTrust, which was in the data room before the deal with QIC was signed, might come back to the table with an increased bid. On top of that, we thought the upcoming special dividend which would add franking credits to the value of the deal was being underestimated.
We’ve had two pieces of good news over the last few days. Firstly, PEA announced that it would be able to pay a special dividend of $0.065 per share. Including the $0.015 final dividend, that would generate $0.034 in franking credits (a further 3.5% on our entry price). We estimated roughly 3% at the time of entry so we were pretty close to the mark.
The second, and even better, piece of news is that PEA has gone into a trading halt this morning pending an announcement regarding a new change of control transaction. The AFR this morning reported that OPTrust had come back to PEA with a new offer, so it seems things are playing out exactly as we had hoped.
We still need to see this new offer formalised and recommended to shareholders, and if that happens, we could have a bidding war on our hands. We will update members further when details of the new offer are released.
Original Recommendation – 24 July 2019, 10:52am
PEA is a stock that has appeared on our investment radar only over the last 24 hours after the stock went into a trading halt after it had been approached about a change of control transaction. PEA is a power generation project developer and owner based in WA and counting executive director Ken Hall as its 49% shareholder and kingmaker, so the company is not well-known because of its small free float.
After a short trading halt, the company has announced this morning that it has signed a scheme implementation agreement with QIC (one of Australia’s biggest infrastructure investors) which would see shareholders paid $0.975 per share. The payment is made up of $0.96 in capital and a $0.015 fully franked dividend. Additionally, PEA will be entitled to pay another special dividend which will come off the total consideration but would generate further value for shareholders in the form of franking credits.
The conditions attached to the deal are very standard, and none of the usual conditions which could concern us are included (such as financing and due diligence) so this deal will proceed without a hitch in the absence of a competing bid. And a competing bid is where we could see some upside in this stock, as Canadian pension fund OPTrust was a late entrant into the process and apparently made a bid. Given the quick process, we could easily see OPTrust come back with a competing offer so if we’re able to buy the stock near the bid price we effectively have a low-risk exposure to a potential bidding war.
Additionally, the value of any special dividend shouldn’t be ignored. In its 2018 annual report, PEA was sitting on franking credits worth roughly 3% of the market capitalisation of the stock (and that number should have grown over the last year), so we could see a good bonus from any special dividend that ultimately flows to shareholders.
The only issue with PEA is liquidity, as only roughly 40% of the stock is in freely-traded hands so it may take some time to get set. We’re happy to buy the stock up to the value of the cash offer even though the current timeline to hold is up to four months based on the chance of another bid and the value of the franking credits, and we’re happy to be patient in getting set.
We therefore recommend members buy PEA at no higher than $0.975 per share for a low-risk, short-term investment opportunity.
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