All was fine when Petroamerica Oil (TSX:V.PTA, Stock Forum) began courting Suroco Energy (TSX:V.SRN, Stock Forum) at the end of April when the companies signed an arrangement where Petroamerica agreed to acquire all the issued and outstanding shares of Suroco through a share exchange which represented a 36.4% premium over Suroco's closing price on April 22, 2014 and a 66.6% premium over Suoroco's 10-day volume weighted average trading price. The deal held tremendous upsides for both parties and I for one, thought the deal was done. That is until Vetra Acquisition dropped its hostile offer in June.
Vetra, immediately drawing fire over inaccuracies in its corresponding press release, stepped in swords drawn with a coercive tactic that distorted financial advisor / investor relationships when it amended its Soliciting Dealer Group Agreement to include the payment of a proxy solicitation fee to advisors who solicit Suroco shareholders to vote against the Petroamerica arrangement. A move that was condemned by many Canadian market participants.
Suroco's management continued to extol the virtues of Petroamerica's arrangement over Vetra's opportunistic cash buyout with ISS Proxy Advisory Services even recommending that Suroco's shareholders vote in favor of Petroamerica's offer, but Vetra continued its attack.
In response to Vetra's efforts, Petroamerica amended its offer to include the best of both worlds with a combined cash and share offer worth $0.80 per Suroco common share and in a news release today, the company exposed major holes in Vetra's hostile bid.
In the news release, the company outlined how Vetra was attempting to extract value that should accrue with investors. It also pointed out that the Vetra offer is not a contract and there is no certainty of closing as well as the fact that Vetra can reduce its consideration to Suroco shareholders of the Petroamerica arrangement isn't approved.
The company also stated that all Suroco shareholders are not guaranteed to be treated equally under the Vetra offer and the offer itself will breach a financial covenant and may trigger a material debt repayment that could place Suroco under serious financial stress.
Petroamerica management went on to explain that Petroamerica's offer would benefit Suroco shareholders by allowing them to retain ongoing exposure to the prolific N Sand oil play while giving them exposure to the successful emerging low-side fault closure play in the Llanos Basin.
Furthermore, Suroco shareholders would be part of a leading, well-capitalized, Colombia-focused E&P company, not to mention that research analysts target prices for Petroamerica imply a $0.98 per Suroco share of potential value to Suroco shareholders with equal treatment to all shareholders.
Lastly the valuation gap enables Suroco shareholders the opportunity to realize further upsides as Petroamerica continues to grow.
Company Executive Chairman, Jeff Boyce, commented, “The Vetra Offer should create some doubt amongst the Suroco Shareholders. There is too much upside value at stake, especially with the upcoming drilling in the PUT-7 block, for shareholders to sell out for cash at this point.”
He went on to explain, “The Vetra offer doesn't allow Suroco shareholders to participate and share in the substantial potential upside of the N Sand oil play. This further begs the question - what else could Vetra know about the Suroco assets?”
And then finally concluded, “For this reason, Petroamerica is offering shareholders of the combined company the opportunity to participate in expected significant equity value appreciation over the next couple of years.”
Petroamerica was in the news recently when the company provided strategic rationale for an increased Suroco offer three days ago.
Shares climbed 4.48% on the news to $0.35 per share.
Currently there are 597.7m outstanding shares with a market cap of $209.2 million.