This time THE Korea national Oil Corp. didn’t miss out. Thwarted in two previous attempts to acquire European oil and gas explorers, KNOC shed its conservative image in August by launching a £1.9 billion ($2.98 billion) hostile bid for U.K. driller Dana Petroleum. The successful unsolicited offer is the biggest ever by a South Korean company and just the second by an Asian state-owned entity, according to Dealogic. Suddenly, China and India aren’t the only nations willing to pay big premiums for Western-owned resources companies. The Dana deal also coincides with something of a renaissance in the North Sea oil industry.
KNOC first approached Aberdeen-based Dana in June with an indicative offer of £17 a share, then upped the ante to £18. “We had been tracking Dana for KNOC for 18 months,” says London-based Philip Noblet, co-head of M&A for Europe, the Middle East and Africa at Bank of America Merrill Lynch, and the South Koreans’ financial adviser. “We knew from our contacts in the industry it was highly unlikely that there were any other potential buyers around.”
Impressed by KNOC’s thoroughness, big institutions were quickly won over. Richard Buxton, head of U.K. equities at London’s Schroder Investment Management — the top holder of Dana stock, with a 13 percent stake — says KNOC did its homework and talked extensively to institutional shareholders.
Schroder was happy with KNOC’s valuation of Dana. “We valued the company’s existing producing assets at over £13 a share, so anything on top of that was a premium for the company’s potential success with the drill bit,” Buxton explains.
Dana, however, spurned KNOC’s offer as inadequate and opportunistic, arguing that the company was worth more than £21 a share based on an independent expert’s valuation using oil price forecasts. It also said that it was acquiring assets that would push its stock above £30. But Seong Hoon Kim, senior executive vice president of KNOC, countered that £18 was a full and fair value.
KNOC’s readiness to pay a 60 percent premium to the share price as of June 30 — the day before news of its initial approach to Dana broke — also strengthened its bid. By August, KNOC had nonbinding letters of intent from shareholders representing 48.6 percent of company stock. New York–based BlackRock and J.P. Morgan Asset Management joined Schroder in supporting KNOC.
KNOC owed much of its newfound confidence and urgency to a $6.5 billion cash injection from Seoul earlier this year; the company has been charged with doubling South Korea’s oil production by 2012. “The Koreans are trying to catch up with other Asian countries,” says David Hart, an oil and gas analyst at London-based Westhouse Securities. Also, the U.K. market has always welcomed foreign buyers offering good prices.
Yet going hostile was bold by any standard. Dealogic data shows that the only previous successful hostile bid by an Asian state-owned company took place in 2007, when Beijing-based Sinosteel Corp. paid $1 billion for Midwest Corp. of West Perth, Australia.
For an organization with KNOC’s record, the Dana bid looks bolder still. In 2007, KNOC was outbid by Italy’s Eni for London-based Burren Energy, and last year it lost Geneva’s Addax Petroleum Corp. to Sinopec Corp. of China. Dana’s disengagement made hostilities inevitable, Noblet says, adding, “And such was the level of shareholder support for a bid at £18 a share that, reputationally, KNOC could not have walked away without presenting the offer to shareholders.”
While some analysts think KNOC overpaid for Dana, Westhouse’s Hart says it made a good move at a fair price. Amid a mounting realization that the departed oil majors did not fully exploit its resources, the North Sea has been home to some sizable discoveries of late. “KNOC has acquired a useful platform for exploration and appraisal projects at a time when activity in the North Sea is growing, activity which could have a knock-on effect on valuations,” Hart says.
Dana’s new South Korean owner may have discovered its courage — and its cash — at the right moment.
