San Leon – Share Price Fails to Respond to Indicative Bid

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

I previously wrote about San Leon (SLE) here and at that time in September my opinion was this was a BUY, with a preliminary target of 65p. At the start of this week things got interesting, a number of rumours were published by ‘reputable’ news sources and subsequently confirmed by San Leon. Why then have the shares failed to respond anywhere close to the price?

What’s was the background?

On Sunday, the Irish paper the business post published the following rumour which suggested San Leon were in discussions with an unnamed Chinese bidder to acquire the entire share capital, but no price was mentioned. San Leon very vaguely confirmed the rumour before market on Monday here, but stating as is normal in a bid situation that ‘there can be no certainty that an offer will be made or as to the terms on which any offer might be made’. The shares opened up 23% higher, but quickly ran out of steam shedding 10% from the highs of 53p, back down to 49p.

The share price had another boost on Wednesday lunchtime when Sky News suggested a price of £485m has been tabled and suggesting the counterparty to be Geron Energy. The article also stated this equated to an indicative offer of 80p. San Leon after hours on the same day confirmed this here, confirming the details of the deal but caveating that ‘Talks are at a preliminary stage and there are significant uncertainties as to whether or not the matter will proceed further. A formal offer would only be made following due diligence’.

The share price currently though sits at a 37.5% discount at 50p to the tabled indicative offer of 80p.

So what’s going on? Why has the share price failed to react?

The market does not believe this offer will materialise and hence is heavily risking the likelihood. The first issue is the bidder, Geron Energy Investment. Anyone heard of them? There is not much of a record of them on the internet, the only presence I could find is at, but I’m not convinced this is the party named. So no real clarity and given the recent case where Fitbit was subject to a fake bid from an unknown Chinese investment company I can understand the market being cautious.

The press articles also look heavily like they have been placed by an insider. Unsurprisingly Sky News does not put much work into investigative journalism around a unpopular small cap oil companies. My bet would be therefore that someone has fed Sky the story ‘word for word’. I think the market is questioning, who and why?

San Leon also has a long history of failing to deliver and letting down shareholders. Whilst it did appear to get a good deal in Nigeria and the fundamentals look solid we still have not yet had a substantial trading update on the asset despite the deal completing at the end of September. There is a deep mistrust of the management and good news just fails to stick at San Leon.

Is there room for optimism though? Should the share price be higher?

ToscaFund, the majority shareholder at 55.12% released this statement today, which has some interesting wording:

Toscafund has requested that the board of San Leon Energy respects and engages in discussions with the potential Offeror to assess its approach.

Toscafund notes that the only two comprehensive external research notes covering San Leon Energy were issued in September 2016 by Whitman Howard and SP Angel and set a target share price of 130p and 100p, respectively

Tosca is requesting the ‘board respects and engages in discussions with the potential offeror’. It also points to two notes from the house brokers which have targets significantly above the indicative offer price.

I’m not accusing Tosca of leaking this information, it could have come from a number of sources but I certainly don’t think they would have been upset to see this information in the public realm. The bid rumours forced the board to announce the potential deal, which they may have been sitting on for a while. It wouldn’t surprise me to learn that Tosca are putting serious pressure on the board to get a return on investment as the shares meanwhile languish again below the most recent placing price, at 44p. Let’s not also forget that Tosca has been a longer term holder in San Leon and has previously placed money in at 80p and higher. I believe Tosca are also suggesting by pointing to the broker notes that the minimum they are likely to accept is 100p+. Tosca to me is therefore sending a clear signal of a beauty parade to be had. Their share is potentially for sale and these are the terms.

But ToscaFund has majority control, so why don’t the offeror deal directly with Tosca? Irish Law makes hostile takeovers very challenging due to the requirement of the buyer to gain greater than 90% of shareholder support for takeover. Scheme of Arrangements can reduce this requirement, but this requires the blessing of the board. So it’s best bet for now is to appeal to the board to facilitate offers.

Final comment to my opening concern, San Leon did also ‘confirm that Geron Energy Investment is a party to the Offeror’. This to me suggest Geron are an agent to an ultimate buyer, this may explain why no one has the foggiest about who Geron are. Who therefore is the real interested party?

What’s my view?

Author’s View – Maintain BUY, Target 65p Minimum

As mentioned in my earlier piece, I like this company a lot on fundamentals, I won’t try and repeat my earlier article here, but assuming performance of the asset is currently as expected San Leon is expected to be on 19% dividend yield in the near future. The company is not distressed so I feel fairly comfortable holding the shares even with no bid situation. I appreciate the past but I feel there is a heavy discount already priced in here for the history. The OPEC deal can’t have done any damage to the business case since my last blog either.

There is now also the potential added upside of the major shareholder being open to a potential sale. The major shareholder is also a shrewd bugger, a $4bn hedge fund is not necessarily a bad fellow investor to coexisit with on the share register in this context.

If the bid comes to nothing though I would expect the shares to slump back in the near term. The failure to meet guidance may also hammer the share price given the continued lack of delivery. I am very much looking forward to the next trading update and for now I’ll try and ignore the speculation.

Disclaimer – I have long positions in this stock equal to 2% of my NAV

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

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