BG Offers $3.1 Billion Cash to Acquire Queensland Gas

By Angela Macdonald-Smith

Oct. 28 (Bloomberg) -- BG Group Plc, the third-biggest U.K. oil and gas producer, agreed to pay A$5.2 billion ($3.1 billion) for the rest of Queensland Gas Co. as it seeks to ensure the development of a gas export project in Australia.

BG will pay A$5.75 a share in cash, 80 percent more than Queensland Gas's last closing price, the companies said in a statement today. BG already owns a 9.9 percent stake in the Brisbane, Australia-based company and said that following trading today it estimates it controls up to 57 percent of QGC's issued share capital.

BG Chief Executive Officer Frank Chapman, 55, last month failed in a A$13.5 billion offer for Origin Energy Ltd., Australia's biggest producer of gas from coal seams, after Origin attracted an investment of as much as $8 billion from ConocoPhillips. Buying Queensland Gas may ensure BG's project starts up before rival ventures seeking to tap Pacific region liquefied natural gas demand that Wood Mackenzie Consultants Ltd. says may jump 83 percent by 2020.

``Perhaps one of the things that BG is looking at is to get this project up and beat others to the market; that would make sense,'' said Stuart Baker, an oil and gas analyst at Morgan Stanley in Melbourne. ``At the end of the day LNG is a game for people with balance sheets; if you look around the world it's not something that small companies can manage well.''

Share Purchases

Based on Queensland Gas's proven, probable and possible reserves, the offer price is about half as much as Houston-based ConocoPhillips paid for the Origin venture.

Along with its existing holding, BG has secured pre-bid agreements or conditional commitments for 46.2 percent of Queensland Gas's shares. Those include acceptances from the two biggest institutional investors, ANZ Infrastructure Services Pty and Sentient Group, and from the chairman and managing director. They also include the stakes of the largest shareholder, AGL Energy Ltd., and directors that are conditional on there being no higher offer.

BG said it estimates that this commitment, combined with QGC shares acquired in trading today, ``now accounts for a total of up to 57 percent of all the issued share capital in QGC.'' It said it bought more than 100 million shares at the offer price, representing 10.9 percent of QGC issued share capital.

Queensland Gas jumped in Sydney trading, matching the offer price by rising A$2.55, or 80 percent, to A$5.75. AGL advanced 7.3 percent, to A$14.38. BG rose as much as 36 pence, or 5.4 percent, to 700 pence in London today and was trading up 4.3 percent at 692.50 pence at 8:09 a.m. London time. The gain in BG shares followed a slump of 7.4 percent yesterday, extending a similar drop on Oct. 24.

Crude Slump

The offer is still below Queensland Gas's record of A$6.39 reached less than five months ago. Since that time crude-oil prices have halved in New York and the collapse of Lehman Brothers Inc. has led to a slump in lending and tumbling stock prices.

``The risk and uncertainty facing the future clearly did change,'' Queensland Gas Managing Director Richard Cottee, 53, said on a conference call, citing an increase in Queensland Gas's weighted average cost of capital, or WACC, since the worsening of the credit crisis. ``Our WACC got whacked in the last eight weeks. We obviously believe this is delivering, in a net present value sense, the best return for our shareholders given certainty and risk.''

Should BG buy all of Queensland Gas, it will take 100 percent ownership of their proposed A$8 billion LNG project near Gladstone on the Queensland coast to tap rising demand for cleaner-burning fuel in Asia. Two rival ventures, comprising ConocoPhillips and Origin, and Malaysia's Petroliam Nasional Bhd. and Santos Ltd., have similar plans, with targeted dates for the start of exports within about a year of BG's.

LNG Funding

Queensland Gas may have had difficulty funding its part of the LNG project, leading to delays beyond the scheduled start-up date of 2013, Morgan Stanley's Baker said.

``Everything has changed in eight weeks; this is a different environment now,'' he said. ``I applaud someone running a company who's practical enough to make a decision and respond to changes in the financial environment. Here's a guy that's said `the game's changed, it's time to pass the baton to someone who can run faster'.''

BG, in seeking to buy Queensland Gas, is ``taking a long- term view'' on the outlook for gas demand and prices, Chief Financial Officer Ashley Almanza said on the call. The decline in the Australian dollar, which has fallen 19 percent against the British pound in the past three months, was ``not a major factor'' in the bid or its timing, he said.

Transaction Banks

BG is being advised by JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley. Queensland Gas is being advised by Austock Corporate Finance Pty and ABN Amro Morgans Corporate Ltd. The U.K. company, which already has initial approval for the takeover from Australia's Foreign Investment Review Board, will fund the purchase from cash and existing debt commitments.

Sydney-based AGL Energy, Australia's biggest power and gas retailer, will get access to gas reserves as part of the A$1.18 billion deal to sell its 22 percent stake to BG.

AGL will have the right to buy 1,097 petajoules (1 trillion cubic feet) of proven, probable and possible gas reserves, in addition to exploration acreage, AGL said in a separate statement to the exchange. It also has the right to buy the Condamine power station in Queensland and a related gas supply contract.

Like Origin, Queensland Gas owns coal-seam gas fields in Queensland state. Aided by acquisitions, it has boosted proven, probably and possible, or 3P, reserves to 5,683 petajoules and is set to add a further 1,097 petajoules on the completion of an agreed takeover of Sunshine Gas Ltd. On that basis, BG is offering 83 Australian cents per gigajoule of 3P reserves, compared with A$1.65 paid by ConocoPhillips for the Origin venture, and by Petronas for its venture with Santos.

The multiple compares with 52 cents a gigajoule paid by Royal Dutch Shell Plc in June for coal-seam gas reserves owned by Arrow Energy Ltd. and 50-70 cents a gigajoule paid by Queensland Gas for Brisbane-based Sunshine Gas.

BG's offer is final in the absence of a higher competing bid, Almanza said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net