At face value, Seven Group Holdings’ $26.6 million scheme of arrangement offer to Nexus Energy shareholders might appear opportunistic. However, Kerry Stokes’ willingness to take on $423m of spending commitments in the process signals something more strategic.
An SGH play for Nexus has been widely ever since SGH’s chief executive, Don Voelte, resigned as Nexus’ chairman last month. He cited a conflict of interest because of SGH’s “strategic focus” on opportunities in the oil and gas sector.
Voelte, a former chief executive of Woodside Petroleum, told SGH’s annual meeting last year that he was looking at new acquisitions and organic opportunities in the industrial services, energy, food and water sectors. These opportunities would add to SGH’s interests in media, mining and earth-moving equipment, equipment hire and property as well as its $800m of listed investments.
The move on Nexus is more than a portfolio investment, with SGH offering an apparently meagre 2 cents a share for the equity but also announcing that it had agreed to buy the small oil and gas group’s senior debt and unsecured notes for a total of about $155m. It had also agreed to provide $33m to fund Nexus’ settlement of litigation over a drilling contract with Sedco Forex and Osaka Gas.
Beyond those amounts, SGH pointed to capital outlays over the “medium term” to fund Nexus’ capital commitments, including $120m on its Longtom gas project in Bass Strait, $60m on the Echuca Shoals exploration program and $55m on the Crux gas field in Western Australia, in which Nexus has a 15 per cent interest.
There is an element of opportunism in the proposed acquisition. Nexus was facing a April 2 deadline, imposed by its senior lenders, to either refinance its debt or come up with a transaction that would see them repaid $44m and provide cash backing for a $60m undrawn letter of credit by July 1.
Nexus has been teetering on the brink of administration after an electrical problem shut down its Longtom project -- its only cash-generating asset -- last month. Despite protracted attempts last year to sell assets or attract an offer for the entire company, Nexus wasn’t able to drum up a transaction.
Voelte had been appointed chairman of Nexus in 2012 after a distress call from one of his former Woodside colleagues, Nexus CEO Lucio Della Martina. Therefore he knows Nexus’ financial position and asset portfolio intimately.
Stokes described Nexus today as an “excellent investment, provided there is an immediate injection of the agreed major capital in the next several weeks”.
He said Nexus would provide SGH with an opportunity to invest in a business with quality assets and strong growth prospects that suited SGH’s strategy of deploying capital in sectors in which Australia had long-term comparative advantage.
Nexus’ key asset is probably its 15 per cent interest in the Shell-operated Crux development. Shell has an 82 per cent interest in Crux and a 3per cent interest in Osaka Gas. A key to the value of Crux and Nexus to SGH will be how and when Crux is developed.
Nexus would prefer to see it as a standalone project using Shell’s floating LNG technology, whereas Shell has indicated it is looking at Crux as an eventual source of additional gas for its Prelude project, which would see any development deferred until far later.
Nexus shareholders will get to vote on the scheme of arrangement in June. But in the company’s circumstances, they will have little choice but to endorse it if they want to receive anything at all for their shares.
Voelte told last year’s SGH annual meeting that he saw great options to add new assets and businesses in the current environment and had several parties that wanted to partner with SGH.
That could suggest that the move on Nexus is the first of a prospective flurry of acquisitions as Voelte and Stokes seek to diversify SGH away from its reliance on media and the WesTrac Caterpillar business, both of which are facing some challenges.