Heads or Tails, you lose

Asiasons Capital Ltd’s proposal to acquire a 20% stake in Black Elk Energy Offshore Operations (Black Elk) from US-based hedge fund Platinum Partners Value Arbitrage (PPVA) is a one way bet to lose money for the Company. 

The Deal

The unaudited 30 September 2013 accounts for Black Elk shows a negative shareholder value of US$104.6 million with cumulative losses of US$86.7 million for FY2013. The Company is also faced with the prospect of defaulting on US$149 million in secured notes by end December. Large investments are also required to increase operating capacities. Whichever way you look at it, it is a black hole that will need a lot more cash. And shareholders of Asiasons will end up carrying this load.

Additionally, the acquisition will result in heavy dilution to existing shareholders. Based on its 2012 Annual Report, Asiasons had 973,213,529 shares outstanding. On top of a US$45 million promissory note to be issued to PPVA by Asiasons, the proposed deal will also see a staggering 494,230,769 shares issued at $0.13 to purchase 20% of PPVA’s stake in Black Elk. 

This values Black Elk at US$482 million. Black Elk has never made any money, with negative US$104.6 million in shareholder value. As such, Asiasons is valuing Black Elk with a goodwill of US$587 million. Not bad for PPVA that bought an 84.3% stake in this company for US$100 million. It also allows PPVA to now recognise a revaluation gain of US$210 million. A brilliant move to achieve an abnormal performance for an investment that has not done well.

A further 46.5 million shares will be issued as an ‘arranger fee’ to Jett Capital Advisors LLC (Jett Capital) if issued at $0.13. The new shares issued will be equivalent to 56% of the current outstanding shares. Post-acquisition, PPVA and Jett Capital will own a combined 35.7% of the enlarged share base. Furthermore, the theoretical ex-issuance share price will be approximately $0.09 due to the influx of new shares.

We think this deal will likely not close. It is conditioned on the Securities Industry Council waiving PPVA from complying with Rule 14 of the Singapore Code of Takeovers and Mergers, which relates to mandatory takeover offers for a company. 

Further, it will be surprising for SGX to approve the listing of the new shares to be issued to PPVA considering the heavy dilution and the poor quality of the assets to be acquired.

Asiasons currently has net assets of $235.6 million or $0.24 per share. Of this, $121.3 million is in ‘financial assets’. However, the collapse in the value of its holdings in LionGold Corp Ltd results in an unrealised loss of $106 million or $0.11 per share. Adjusted NAV is therefore $0.13 per share, and likely to fall further given its equity portfolio. 

The current stock price is $0.144, up from $0.123 before the news announcement. If the deal fails, the stock price should fall to a discount to adjusted NAV. If the deal succeeds, existing shareholders of Asiasons get heavily diluted in exchange for an asset that will continue to bleed.