By Angela Macdonald-Smith
Aug. 19 (Bloomberg) -- Origin Energy Ltd., Australia's biggest producer of gas from coal seams, told shareholders to reject BG Group Plc's A$13.8 billion ($12 billion) offer and instead back a plan to select a partner for fuel exports.
Origin, based in Sydney, has short-listed bidders for a venture to convert coal-seam gas to liquefied natural gas, and investors should let that process continue, Managing Director Grant King said today on a conference call. Origin's shares have been trading above Reading, England-based BG's A$15.50 bid, signaling some investors expect a higher price.
BG plans a A$8 billion LNG export project in northeastern Australia and buying Origin would bolster reserves for the venture and hand BG ownership of the nation's second-biggest energy retailer. BG says its offer, made directly to investors after Origin's board rejected it in May, provides shareholders with ``full value'' and the certainty of cash.
King's ``under a lot of pressure to come up with something; It's a bit of a `trust-me' exercise,'' said Grace Chan, a utilities analyst at JPMorgan Chase & Co. in Sydney. ``BG's is a cash offer, which I would have thought in the current environment would be pretty attractive.''
Origin fell as much as 22 cents, or 1.4 percent, to A$15.93 in Sydney trading, still 2.8 percent above BG's offer price. Brokers' average 12-month share-price targets for Origin shares range from A$17.01 to A$20, Origin said in its formal response to BG's offer, lodged today with the Australian stock exchange.
`Completely Inadequate'
Origin's response ``lacks any substance or clarity'' and fails to provide any evidence that BG's offer undervalues the company, BG Chief Executive Officer Frank Chapman said.
``Origin argues that its current market price and brokers' price targets justify a decision to reject our offer,'' Chapman said in an e-mailed statement. ``These are completely inadequate responses to an all-cash offer which provides a 72 percent premium.''
The Sydney-based company has received several proposals for its coal-seam gas assets, all involving an LNG project, King said. Bidders include LNG project developers, he said, declining to identify the companies or confirm a media report that Royal Dutch Shell Plc and BP Plc are among potential bidders.
``We've narrowed the list down to the very serious participants,'' King said. ``It's still a manageable but quite substantial number of people looking at it.''
Changed Mind
Origin will probably present the proposal to shareholders, together with an independent expert's report assessing the company's valuation, at least a week before BG's offer expires on Sept. 26, King said.
``We don't believe BG's offer goes anywhere near compensating Origin shareholders for the value of its business,'' King said. He reiterated Origin's target of 10-15 percent annual growth in earnings a share.
A $2.51 billion agreement in May by Malaysia's Petroliam Nasional Bhd. in Santos Ltd.'s rival coal-seam gas venture in Queensland state indicates Origin's coal-seam gas assets may be worth 97 Australian cents a gigajoule, or A$9.8 billion, compared with BG's stated estimate of between 50 cents and 70 cents a gigajoule, Origin said in a presentation sent to the exchange.
Origin's board had previously agreed to recommend BG's bid to shareholders and changed its mind after the announcement of the Petronas transaction.
Five Rivals
``Origin's board and management are clearly confident that their partner selection process is likely to yield a proposal that has a higher value than the current offer from BG,'' David Leitch, a utilities analyst at UBS AG, said in a July 30 report. ``Our estimate of Origin's value is about A$18-A$20 per share.''
Five rival ventures are already proposing to build LNG projects in northeastern Australia, using coal-seam gas as a fuel. Any separate proposal by Origin and a partner would be competing against ventures by BG and Queensland Gas Co., Petronas and Adelaide-based Santos, and others.
Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed.
LNG is natural gas that has been chilled to liquid form, reducing it to one-six-hundredth of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. On arrival, it's turned back into gas for distribution to power plants, factories and households.
To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net
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