Posted on August 20, 2010 - by Venik

Dana Petroleum bid goes hostile as KNOC turns up heat in battle for oil

Hostile bid by Korea National Oil Corporation is first to be launched by a state-owned oil company

The scramble by emerging economies to secure future energy reserves has injected new heat into London’s mergers and acquisitions market, with an Asian group launching the first hostile bid by a state-owned oil company – this time for a North Sea explorer.

Korea National Oil Corporation (KNOC) announced a £1.87bn takeover bid today for Dana Petroleum. The approach was immediately rejected by the Dana board, even though it could net its chief executive, Tom Cross, an estimated £60m.

KNOC has already completed a string of successful friendly acquisitions over the past two years. It said tonight that it had obtained support for its cash offer of £18 a share from just under half of Dana’s shareholders.

Seong-Hoon Kim, senior executive vice-president of KNOC, said the company was offering a “full and fair price” but regretted having to make a hostile bid.

“It has always been our desire to agree a recommended transaction with the board of Dana and we are very disappointed that the board of Dana does not agree that £18 per share represents a full and fair value for the company,” he said.

“We believe that we have no alternative other than to put our attractive proposal directly to shareholders. We hope that Dana shareholders will recognise the merits of our offer.”

But Cross and his fellow directors, who have repeatedly shunned previous friendly approaches from the South Koreans, told shareholders to ignore the latest bid, which is at a premium of nearly 60% to Dana’s share price on 30 June, the last business day before the approach was announced.

In a statement to the London Stock Exchange, Dana advised shareholders and convertible bond holders “to take no action in respect of the offers” and said that it would give an update on its production, development and exploration activities with its half-year results next Friday.

But the tide seems to be turning against Dana, whose shares jumped nearly 6% to £17.93. The City fund manager Schroders, Dana’s largest investor with a 13% stake, has already publicly called for the British company’s board to meet KNOC.

Talks between the two companies broke down this month after they failed to agree on terms that would give KNOC access to Dana’s books. A week ago, the Korean company refused to raise its offer again, having previously increased it from its initial level of £17 a share.

Cross, who founded Dana, retains a 2% stake, which would give him about £30m in the event of a sale, but some observers have estimated that he could earn double this if all share options and bonuses were taken into account.

Seoul gave KNOC a $6.5bn (£4.2bn) war chest this year to boost the country’s oil reserves as the battle between Asian state-owned oil companies for overseas reserves heats up. Heavy oil-consuming countries fear that crude prices can only rise from their present level of $73 a barrel as new output becomes harder and more expensive to find and produce.

In the past two years, KNOC has bought Harvest Energy in Canada for $3.9bn, Taylor Energy in the US for $877m and Offshore International Group, also in the US, for $450m, but it missed out in a race for the London-listed Addax Petroleum, which was scooped by Sinopec of China.

The national oil companies in Beijing have also been particularly active, buying up assets worldwide as they attempt to secure oil reserves that will feed the country’s growing need for imports. Chinese companies have been active in Africa, while Russian, Venezuelan and Brazilian state groups have also been flexing their muscles. There has been speculation that one of these could make a bid for BP, weakened by the Deepwater Horizon spill in the US.

The growing power of these national energy champions has rattled political cages in the west. Westminster politicians expressed great concern four years ago when Russia’s Gazprom hinted that it was looking at a bid for British Gas.

China National Offshore Oil Corporation caused a political storm in 2005 when it made a $18.5bn bid for Unocal of America. It later backed off under pressure from Washington.

The Seoul government has given KNOC a clear mandate to double the company’s production levels to 300,000 barrels a day by 2012 and increase reserves to 2bn. Dana has relatively little output currently – at only 37,000 barrels a day – but has 223m barrels of reserves and an excellent record of making new finds.

The company, based in Aberdeen, has most of its interests in the UK and Dutch North Sea but has always had an extensive international portfolio, with exploration interests in Egypt and Morocco.

Analysts at Evolution Securities said that KNOC’s decision to go hostile was no great surprise, and noted that, with more than 48% of acceptances, the predator was “almost over the finishing line”.

But a research note suggested that analysts had been caught out by industry’s willingness to pay a premium for assets, adding: “KNOC’s offer for Dana [20% higher than analysts' target prices], Vedanta’s offer for Cairn India and BP’s disposal of its Colombian reserves have all surprised the market.

“This would suggest the market is underestimating the value of company assets relative to industry, which may be using higher commodity price assumptions and or lower discount rates.”

While the willingness of KNOC to go hostile represents a new phase in the fight for energy reserves, no one expects a laissez-faire British government to worry too much about a local company being bought by a politically friendly country such as South Korea.

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