The international merger of Imperial Energy Corporation

This report examines the international merger/acquisition of Imperial Energy Corporation Plc (“Imperial Energy”) by Jarpeno Limited (“Bidco”) a wholly-owned subsidiary of ONGC Videsh Limited (“OVL”).A merger is a combination of 2 or more companies in such a way that the buyer automatically takes over the assets and liabilities of ‘target’ or seller and still maintains it original identity (Sherman et al; 2005). In this case, the buyer is Jarpeno Limited (“Bidco”) a wholly-owned subsidiary of ONGC Videsh Limited (“OVL”) while the seller or ‘target’ is Imperial Energy Corporation. We would therefore go on to analyze this pre conditional offer to merge these two companies.

Research Methodology

In this report we have analyzed the merger between Imperial Energy Corporation by Jarpeno limited (Bidco) a wholly owned subsidiary of ONGC Videsh limited (OVL). We have analyzed this merger on the basis of motives, cost and benefits and the mechanics of merger. Our main focus in this report is on the mechanics of merger and we have briefly described the motives and gains and cost of the merger.

MOTIVES OF THE MERGER

The motives behind any merger/acquisitions are often numerous. Corporations may merge because they want to increase their market share, spread their costs and risks, become more international and also for the need to transform their corporate identity.

JARPENO LIMITED (BIDCO)

Bidco a wholly owned subsidiary of ONGC Videsh Limited here is deciding to buy the entire shares and convertible bonds of Imperial Energy Corporation. Considering the fact that ONGC is the largest oil and gas exploration and production company in Asia, and Imperial Energy is an independent oil exploration company focused particularly in Russia, the main motive for this merger would be to diversify. Currently present in about 4 continents and 17 countries, ONGC obviously wishes to increase its market share by diversifying internationally by opting to buy the shares and convertible bonds of Imperial Energy situated in Russia.

IMPERIAL ENERGY LIMITED

After analyzing the current state of Imperial Energy, it can be seen that the company was indeed running at loss. Despite the fact that the company claims success over the previous years, it is evident from the information given that it is obviously running at a loss (from US$14.3 million in 2006 to US$42.0 million in 2007). This is the sole reason they wish to merge with Bidco so that their losses can be absorbed. Also, the directors were not sure as to whether they would receive any other offer as better as what Bidco was offering their company. The directors of Imperial Energy recommended that the shareholders accept the offer. Apart from the fact that the offer price is indeed an attractive one (1250pence per share), their recommendation could also be from fact that they own about 6.3% of the issued shares of the company. Hence they stand to gain more from the merger than the rest of the shareholders. This can be seen as a dubious motive for wanting to merge with Bidco(OVL).

GAINS AND COSTS OF THE MERGER

Bidco by offering to buy the shares and convertible bonds of Imperial Energy, have been able to acquire their assets as well as being able to diversify or increase its operations. They have thus been able to gain control and in the long run may increase their market share in the oil and gas exploration and production industry. On the other hand, acquiring Imperial Energy involved an enormous cash offer which would obviously have a cost effect on the company. They offered to buy not only the shares of the company but also the convertible bonds. The amount spent in the cash offer could alternatively be used to build up their company (organic growth) rather; they chose to buy Imperial Energy.

Imperial Energy was able to transfer their liabilities to Bidco as a result of the merger. They would therefore be relieved of their losses so stand a lot to gain from the merger. Apart from the gains stated above, it is very obvious that they lost control to the buyer of their company (Bidco) by selling their shares and convertible bonds.

Mechanics of Merger

Merger is one of the most popular and easiest ways to diversify the business due to which the market position of a company increases and at the same time, the level of profit also increases through additional customer base and resources. In order to merge, a company has to go through certain mechanics to make the merger possible. Steps of these mechanics are as follows:

Mechanics of merger process goes by a certain strategy. It starts by the company who want to acquire another company gives an offer to the target company. This offer is provided only after the top management of the company is determined about the process. The next step is purchasing the shares of the target company. According to the rules any company or individual can only buy maximum 95% shares of another company, in case of mergers the acquiring company can buy maximum 95% shares of the target company and while doing this the acquiring company has to inform the SEC there intentions for making this purchase (i.e. that it wants to invest in the company or wants the ownership of the company.)

in the next step of merger process the acquiring company decides on the share price which they’ll offer to target company through the advice and consultation of their financial advisors and analysts, they also decide that how this how this finances will be provided to the target company whether in the form of cash or in form of any other equity and after making the share price offer to the target company they announce the deadline date for the investors and shareholders of the target company to review and analyze the offer and give their final decision they either accept or reject the offer.

now comes the turn of the target company to respond, target company after analyzing the proposal through the advice of their financial advisors and financial analyst either accept or reject the proposal. Their decision totally depends on the company’s management and the financial analysts advices, if they feel the proposal is acceptable and is profitable for them then they accept the deal and if they feel that the price or the conditions of proposal are not quite favorable then they negotiates with the acquiring company and tries to get more profitable prices. Meanwhile when the target company is analyzing the proposal or negotiating with the acquirer on certain terms they on the other hand try to find another acquiring company which can offer them higher prices, if they find one, they finalize it with the new company and if they are unable to find any new company then they negotiate with the previous acquirer and once the negotiations are over and both companies are satisfied to the terms and condition, the target company then accepts the offered price, main part of the merger is over, now remains few formalities (e.g. Final paperwork, government and courts rules and regulations regarding mergers has to be followed) and once these are carried out the merger is complete.

Mechanics of merger between Bidco and Imperial Energy

The first step is sending an offer to the target company by the acquiring company. In this case study two companies has been discussed, one being the acquiring company (BIDCO) and other being the target company (Imperial Energy). BIDCO is a wholly owned subsidiary of OVL that was established for making offers. OVL was established in 1965 (a subsidiary for ONG for the purpose of international production and exploration oil and gas having production and gas exploring activities on four continents along with participation in different projects over 17 countries. Whereas Imperial energy is a public limited company which is a independent oil and gas production company and has its activities based mainly on Russian Federation since its creation and admission to AIM in 2004 (Alternative Investment Market of the London Stock Exchange). Since its creation, imperial Energy has proved themselves by having no reserves in 2004 to having around 920 million barrels of reserves due to their excellent management skills. The main reason behind the merger was that OVL wanted to establish their presence in other regions Russia particularly in Western Siberia, which is one of the world’s largest oil and gas producing regions as well as they would acquire Imperial Energy production region which will increase their profits and reserves potential. Another reason for the merger of because of imperial Energy broad facility infrastructure and pipeline set-up that will give them access to newly laid pipelines and oil production and processing facilities. As well as it the merger will allow the transfer of knowledge, management skills and technical capabilities between them which will improve the exploration and production process. By looking at the above opportunities, OVL under BIDCO decided to offer pre-conditional cash offer of £1.4 billion to Imperial Energy for the entire issue and to be issued ordinary share capital and convertible bond.

In the next step, the acquiring company decides and offers the price for the share that it will pay to the target company. Bidco has offered imperial energy to buy both their ordinary shares and the bonds aswell. below are the details and the calculations of premium offered by Bidco.

Calculation of premium on imperial energy share price

Closing share price on 11 July 2008= 772pence per share

Offered price by Bidco= 1250 pence per share

Premium offered = 1250-772 = 478pence per share

Premium %age= 478 X 100 = 61.9%/share

772

Average Closing share price from 6 may to 16 April (right issue) = 917pence per share

Offered price = 1250pence per share

Premium offered = 1250-917= 333pence per share

Premium %age= 333 X 100 = 36.3% per share

917

Imperial energy bondholders will receive £ 60,367.5 for $100,000 worth of bonds. These are calculated on the basis of exchange rate between both currencies, no premium or discount involved. Imperial energy have issued bonds worth of us$19.3 million which will mature in 2014 and will then be converted to 9,238,64 shares at an adjusted share price of 1004 pence per share (at an exchange rate of US$2.0624 = £1.00). In case of convertible bondholders, they can convert their bonds to shares at 1457 pence per share after the bonds become eligible to convert but before maturity.

After this process, the target company has to give their final decision after taking into consideration costs and benefits of the merger and suggestions from their financial advisors whether to accept or reject the proposal for the merger. The major cost for imperial energy was that they would no longer hold the decision making power and will have to adapt to the new policies. On the other hand, there were many benefits for the company. Firstly, their resources will increase which will result in increase in their profitability. Secondly, they would become part of ONGC, which would be good for the company’s image. As well as the shareholders will get great value for their share by selling at a premium price as compared to the price of the shares in the market. Since the company was going into loss therefore by accepting the merger they would get the of benefit cost efficiency, as it will allow them to do production at large scale therefore reducing cost of production per unit when the output production increases. With the merger, the company will be able to acquire higher market share that will in future benefit share value of the company. In this case, Imperial Energy have been advised by both Merrill Lynch and RBS Hoare Govett to go on with the deal as by their analyses it is a fair deal (Merrill Lynch being the independent financial advisor). As suggested by their financial advisor of the deal being fair, Imperial Energy has decided to accept the pre-conditional offer and terms of £1.4 billion for the share offers.

Lastly after both the companies have agreed on the conditions of the merger, the stages of mechanics of the merger process are complete, only few formalities remains such as signing the agreement and check whether the agreement complies with laws of the country or not. Following passage suggests that the pre-conditional offer complies with the laws of the country:

i“ Government officials states that, the offer having been obtained in accordance with Article 6.4 of the Russian Federal Law of 9 July 1999 No. 160-FZ “On foreign investments in the Russian Federation” and pursuant to the procedure established in Articles 9 – 12 of the Russian Federal Law of 29 April 2008 No. 57-FZ “On the procedure of making foreign investments in commercial entities of strategic significance for the national security of the Russian Federation”; also stated that the offer has followed , the Federal Anti-Monopoly Service of the Russian Federation, with respect to the Share Offer, having been obtained in accordance with Article 28.1.8 of the Russian Federal Law of 26 July 2006 No. 135-FZ “On protection of competition”.