If Origin Energy is right – and bidders are preparing to pay up for its conventional oil and gas spin-off Lattice Energy – it’s time fund managers sharpened up their knowledge of Beach Energy.
The Luminis Partners and Credit Suisse-advised Beach is one of two bidders left in the Lattice auction.
Bids are due early next month and Beach is expected to go head-to-head with Sydney-based private equity investor Questus Energy and its partners, advised by Morgan Stanley.
Lattice is on Origin’s books for about $1.3 billion after a $357 million writedown announced only last week. Analysts say that’s a good sign Origin expects to receive $1.3 billion for the business, although they reckon it could go for up to $1.5 billion depending on how hard Beach and its rival go in the final stretch.
Macquarie Capital and UBS are running the auction and spearheading efforts to drum up a third bid via an initial public offering.
Beach has been the frontrunner all along. Chief executive Matt Kay has spent plenty of time in front of analysts and fund managers talking about company-changing growth through M&A and more than a year into the top job, the former Oil Search head of strategy seems keen to secure his target.
The biggest question is how to fund it – and finding the right balance between debt and equity.
Beach must either take on a whopping debt package to cover both the acquisition and Lattice’s capital expenditure plans in the Otway and Waitsia projects, or turn to its shareholders.
Beach’s market capitalisation is $1.2 billion. If it elected for a $1 billion-odd equity raising, then shareholders are likely to face a one-for-one sized rights issue.
Credit Suisse is on board to help with the funding task and will be doing their best to find cornerstone backers to pile into the offer or at least be there at the back end should there be shares left over. A large chunk of Beach’s share register is in retail investor hands, which adds to the risk.
Of course Beach could also always turn to its biggest shareholder, Seven Group, to help out.
Life at Seven is looking rosy; its shares are at close to a 10-year high, thanks to improved demand for its industrial equipment. And would Kerry Stokes’ Seven baulk at the chance to increase its stake in Beach via a company-changing deal by offering to backstop the raising?