Pulse Directors split on Buller offer

Felicity Wolfe  Friday, 27 November 2015

Pulse Energy directors are divided on whether to accept Buller Electricity’s takeover offer.

Independent directors Trevor Janes, James Hoseason and Peter Young do not intend to accept the $22 million offer, according to the firm's target company statement.

They, or their families, collectively own about 5.4 per cent of Pulse's shares and just over 35 per cent of its mandatory convertible notes.

Buller owns 56 per cent of Pulse and has teamed up with Pioneer Generation to buy the rest of the business, the country’s seventh-largest electricity retailer. It is offering 11 cents a share, $1.10 for the mandatory convertible notes and 5 cents each for staff options.

In today's statement Janes, Hoseason and Young recommend that people who only hold shares and/or options should accept Buller’s offer.
But they have opted not to provide a recommendation for note holders "at this stage". They say a valuation of the notes by independent advisor Campbell MacPherson indicates Buller’s offer is at the lower end of their value range.

“This suggests that continuing to hold Pulse MCNs until maturity may deliver more value.”

The fourth independent director, Joseph van Wijk, recommends acceptance for all three investments.

Structure
Buller, which aims to secure at least 60 per cent of the convertible notes in its takeover bid, is offering holders $1.10. Including interest payments, MCN holders would receive $1.114 before tax, just above their lowest value calculated by Campbell Macpherson. The firm suggests a value range between $1.11 per unit and $1.15.

Pulse has three categories of equity securities, including 334 million ordinary shares. The firm also issued 3.95 million options in various tranches as part of an employee share option plan for key executives. It also has $4.8 million of mandatory convertible notes outstanding.

While Campbell MacPherson suggests the MCN offer is at the lower end of the notes' value, it says the offer of 11 cents per share is above the midpoint of its assessed value range between 9.2 cents and 11.3 cents. It notes Buller’s offer is also an 83 per cent premium on the shares' traded value before the takeover bid was announced.

The report says a premium is “natural” for any 100 per cent takeover bid. 

“Furthermore, in the case of Pulse Energy, it is unlikely that the observed share price fully reflects the market value of the company given its low level of liquidity.”

Buller's 5 cent offer for Pulse options is “significantly” above Campbell MacPherson’s assessed maximum value of 2.8 cents.

Holden, Dooley
Pulse chief executive Gary Holden is the firm’s second-largest shareholder after Buller, with a 5.7 per cent stake. He also holds 300,000 MCNs and intends to accept Buller’s offer. Pulse director and Buller chair Frank Dooley also intends to accept. Interests related to Dooley hold 10 million shares and 100,000 MCNs.

Hoseason, whose family trust holds 4.9 per cent of the firm’s shares and one million, or 20.8 per cent, of the MCNs, does not intend to accept the share or MCN offer. Selenium Corporation, half owned by Janes, has 1.4 million Pulse shares and 12.5 per cent of the MCNs. The firm also does not intend to accept the offers.

Young and his associates hold 100,000 MCNs and do not intend to sell. Van Wijk, who plans to take up the offer, holds 875,156 shares.

Campbell MacPherson’s report says while Buller’s cash offer terms and conditions are “relatively straightforward”, its minimum acceptance conditions of gaining 90 per cent of the shares and 60 per cent of MCNs “add complexity”. The firm says it is “unclear” why Buller added the 60 per cent MCN minimum acceptance level.

“Pulse Energy’s legal advice is that, provided BEL reaches the 90 per cent minimum acceptance condition for the shares, it becomes the dominant owner and would retain its compulsory acquisition rights even if it was subsequently diluted below 90 per cent.”

Next steps
Buller says it will automatically convert any outstanding MCNs into shares if it secures 90 per cent of the shares and 60 per cent of the MCNs by December 16. It would then enact the Takeovers Code’s compulsory acquisition provisions to acquire 100 per cent of any outstanding equity securities.

If it crosses the share threshold, but not that for the MCNs, Buller could increase its price for the notes and extend its offer. Alternatively it may simply waive the threshold and enact the code’s compulsory acquisition provisions.

If it gains 60 per cent of the MCNs, but less than 90 per cent of shares it could increase its share offer or retain all the shares, options and MCNs it has secured and consider launching a new takeover offer. It may also retain any secured equities and look to offering a new deal. All options below the target levels allow Buller to let the offer lapse.

Growth cycle, risk
Campbell MacPherson’s says Pulse’s financial performance is improving and the firm “is at an important inflection point in its growth cycle”. It has about 55,000 electricity customers and plans to grow its book to about 100,000 by the end of the 2019 financial year.

Campbell MacPherson notes Pulse’s interim accounts for the first half of the current financial year shows a positive EBITDAF of $300,000 compared with a $2.8 million loss for the same period last year.

The report warns that the firm’s target of maintaining positive cash-flows while nearly doubling its customer levels in coming years carries “significant risks that should not be underestimated by equity security holders”.

It also notes that Pulse’s non-associated directors believe they are achievable.

“Key drivers of future performance will include achieving customer growth targets in an increasingly competitive market at a reasonable net cost of acquisition, as well as maintaining gross margins and keeping costs at or below projected levels.”

The original article may be viewed here.