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Beach, Drillsearch Merger

October 23, 2015


Beach Energy Limited and Drillsearch Energy Limited announced that they have entered into a binding Merger Implementation Agreement that will create the leading mid-cap ASX oil and gas company through an all-scrip merger.

Under the terms of the agreement, Beach has agreed to acquire all of the shares in Drillsearch that it does not already own4 via a Scheme of Arrangement (the Scheme). Drillsearch shareholders will receive 1.25 Beach shares for each Drillsearch share held.

The merger will create a company of enhanced scale that is positioned for future growth, with combined FY2015 production of 12.1 MMboe 5 and an expanded portfolio of oil, gas and infrastructure assets. The Boards of both Drillsearch and Beach believe this is a logical combination of
two complementary, overlapping businesses, with the opportunity to generate significant value for shareholders of both companies.

The Directors of Drillsearch unanimously recommend that all Drillsearch shareholders vote in favour of the Scheme and they intend to vote the Drillsearch shares that they control in favour of the Scheme, in the absence of a superior proposal and subject to an independent expert finding that the Scheme is in the best interests of Drillsearch shareholders.

Transaction summary
Based on the 1.25 exchange ratio, the consideration to be offered to Drillsearch shareholders values Drillsearch at a price of $0.83 per share and a market capitalisation of $384 million.6 This represents
an attractive premium7 of:

• 27%8 to the closing price of Drillsearch shares on the ASX on 22 October 2015 of $0.655 per share;

• 21%9 to Drillsearch’s 1-month volume weighted average price (VWAP) of $0.58 per share up to and including 22 October 2015; and

• 30%10 to Drillsearch’s 3-month VWAP of $0.63 per share up to and including 22 October 2015.

If the Scheme is implemented, Drillsearch shareholders will own approximately 30% of the total issued share capital of the combined group. It is intended that Drillsearch’s US$125 million of
outstanding convertible notes will be redeemed in accordance with their terms from a combination of cash on hand and available debt facilities shortly after the implementation of the Scheme.

The transaction is subject to the approval of Drillsearch shareholders at a shareholder meeting expected to occur in late January 2016, as well as Court approval and other conditions.

As a consequence of Seven Group Holdings Limited and its subsidiaries (Seven) holding a substantial interest in both Beach and Drillsearch, ASX Listing Rule 10.1 may require approval from Beach shareholders (by a 50% resolution) in respect of Beach’s acquisition of Seven’s Drillsearch shares (Substantial Shareholder Acquisition). Beach is in discussions with the ASX regarding a waiver to Listing Rule 10.1, which (if granted) would remove the need for Beach shareholder approval.

The Directors of Beach unanimously recommend that all Beach shareholders vote in favour of the Substantial Shareholder Acquisition and they intend to vote the Beach shares that they control in favour of the Substantial Shareholder Acquisition, in the absence of a superior proposal and subject to the opinion of an independent expert regarding the Substantial Shareholder Acquisition.

Transaction rationale and benefits to shareholders

The combination of Drillsearch and Beach is based on the clear strategic rationale of unlocking value from an existing partnership whereby Beach already operates two key shared assets of the companies, being:

• The producing Western Flank Oil Fairway Joint Venture formerly known as PEL 91 (PRLs 151 to 172 and PPLs 253 to 256), including the prolific Bauer oil field; and
• The producing Western Wet Gas Joint Venture formerly known as PEL 106 (PRLs 129 and 130 and PPLs 239 and 257).

In addition, the combined group will be in a stronger position to take advantage of future growth opportunities as a result of its increased scale and balance sheet strength.

Given the overlapping interests of the two companies, the Boards of both Drillsearch and Beach believe the transaction will realise synergies and cost savings of ~$20 million per annum (on a pre-tax basis and excluding one-off integration costs). These would be principally sourced from increased operational efficiencies and elimination of duplicated corporate and administrative functions, with the opportunity to relocate the majority of Drillsearch’s corporate functions to Beach’s office in Adelaide. The synergies and cost savings are targeted to be achieved within two years after implementation of the transaction.

As a shareholder in the combined group, Drillsearch and Beach shareholders would also benefit from the opportunity to participate in:

• The leading oil operator and largest oil producer in the Cooper and Eromanga basins with positions in all of the major oil producing permits of the highly successful Western Flank12;
• The Cooper Basin’s second largest gas producer;
• Ownership interests in key infrastructure used to process hydrocarbons from the Cooper Basin region;
• Ownership of extensive gas reserves and resources well situated to supply gas markets on Australia’s east coast;
• A significantly expanded knowledge base relating to the Cooper Basin; and
• Pro-forma FY2015 revenue of $978 million, operating cash flow of $313 million and production of 12.1 MMboe.

Support from Drillsearch and Beach Boards

Commenting on the merger, Jim McKerlie, Chairman of Drillsearch said, “The combination of Drillsearch and Beach is a highly attractive and unique opportunity for Drillsearch shareholders to participate in the creation of the leading mid-cap oil and gas company on the ASX. Under the all-scrip consideration, Drillsearch shareholders will receive a premium for their shares while also gaining exposure to a company of enhanced scale and balance sheet strength that is well positioned to take advantage of growth opportunities.”

Glenn Davis, Chairman of Beach said, “This is a common sense combination of two Cooper Basin businesses sharing significant core assets. The proposed merger will provide both Beach and Drillsearch shareholders exposure to a more efficient, cost effective and diverse Cooper Basin business with larger production and reserves, delivering real benefits to all shareholders.”

Merger Implementation Agreement

The Scheme is subject to certain terms and conditions, which are contained in the Merger Implementation Agreement and include:

• Approval from Drillsearch shareholders14, ASIC and the Court;
• The independent expert concluding that the Scheme is in the best interests of Drillsearch shareholders;
• In the absence of receipt of a waiver from Listing Rule 10.1 by the ASX, approval of the Substantial Shareholder Acquisition by Beach shareholders; and
• No material adverse change or prescribed occurrence in relation to each company.

The parties have also agreed to certain exclusivity provisions and break fee arrangements.

Under the Scheme, the Beach Board would be reconstituted with Jim McKerlie and Phil Bainbridge from Drillsearch to be appointed as new Beach Directors and two existing Beach Directors to resign from the Beach Board. Glenn Davis would continue to serve as Chairman of the Beach Board following the successful conclusion of the merger.

A Merger Integration Group led by Beach Acting Chief Executive (Neil Gibbins) and Drillsearch Chief Executive (Walter Simpson) will commence planning for the combined group immediately. Management will be selected on a “best for job” basis, drawing on the depth and experience available within the combined management teams. The Beach Board is currently conducting a search for a new Chief Executive who will become the Chief Executive of the combined group following completion of the transaction. Drillsearch will be consulted on this appointment.

A full copy of the Merger Implementation Agreement is attached.
Timetable Drillsearch shareholders do not need to take any action at the present time.

Full details of the Scheme, including the recommendation of the Drillsearch Directors and the Independent Expert’s Report will be included in the Explanatory Booklet to be sent to Drillsearch shareholders. It is expected that the booklet will be sent to shareholders in mid December. Subsequently, Drillsearch shareholders will be asked to vote on the Scheme at a meeting expected to be held in late January 2016.

To the extent Beach shareholder approval is required in respect of the Substantial Shareholder Acquisition, a Notice of Meeting, recommendation from the Beach Directors and an Independent Expert’s Report will be sent to Beach shareholders. These materials are expected to be sent to Beach shareholders in December, after which the Beach shareholder meeting would be held prior to the Scheme meeting.

Set out below is an indicative timetable for the transaction:

Event                                                   Date
First Court Date                                   Early-December
Dispatch Notice of Meeting to
Beach Shareholders (if required)          Early-December
Dispatch Explanatory Booklet to
Drillsearch Shareholders                       Mid-December
Beach Shareholder Meeting (if required) Mid-January 2016
Scheme Meeting                                  Late January 2016
Second Court Date                              Mid-February 2016
Effective Date                                      Mid-February 2016
Record Date                                       Late-February 2016
Implementation Date                            Late-February 2016

Beach is being advised by Macquarie Capital as financial adviser and Minter Ellison as legal adviser. Drillsearch is being advised by Goldman Sachs and UBS as financial advisers and Ashurst as legal

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