Tullow's £201 million sterling (€336 million) deal to acquire two North Sea gas-producing packages with associated pipelines and infrastructure will transform the company. Pulling off the deal will be a coup for Tullow managing director Aidan Heavey. It will double the company's size, but more importantly it will provide Tullow with significant cashflow, which can be used to fund future exploration and development.
At first glance the price of the assets appears high, at some 2.25 times their net book value. But a better measure of the real value of the assets involved is their net present value, or the value in present terms of the output of the fields over a period of time. On that measure - which is notoriously difficult to estimate because of the nature of exploration assets - analysts estimate that value at or about the agreed purchase price.
Taking a profits multiple approach, the price agreed is 5.4 times the £37.3 million pre-tax profit attributable to the assets for the year to December 1999. While it is not a cheap deal, Tullow has benefited by the forced nature of the sale - BP Amoco had to sell the assets to ensure EU approval for its takeover of Atlantic Richfield.
The £41.8 million sterling share placing and offer to part-fund the deal is fully underwritten. Existing shareholders can subscribe for 39.3 million shares to a value of £22.6 million sterling on the basis of one new share for every seven they hold. At 57.5p sterling the offer price is at a 9.5 per cent discount to the 63.5p price of the Tullow shares before they were suspended pending the deal announcement.
With the deal giving Tullow the capacity to further its aims to become a major player in the gas-to-power business in selected markets, it will be surprising if most shareholders don't decide to take a punt and bank on Mr Heavey's ability to make the deal work.
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