How to Build a Junior Oil Producer:  Petro One Energy (TSX:V – POP)

Buyouts: What’s the point of Poison Pills?

In my last write up I mentioned a few of my past favorites in the Junior Oil Sector had gone on to great things.  Larger companies digested most of my favorite small companies, and I was happy to make a profit.  This said, there were a few deals where I feel the directors could have exacted a higher price for the shareholders if they made their companies a bit “harder to swallow”. 

I also made strong mention of the importance of quality, technical management that has brought assets to maturity and successfully steered companies through buyout transactions.  It was good news to see Petro One has brought Paul Reynolds on board, who led Athlone Energy through and acquisition by Daylight Resources Trust. 

Today’s news of the Shareholder’s Rights Plan further confirms my faith in management.  Plans like this are typical of experienced management teams with an eye to develop and realize maximum asset value in an ultimate buyout transaction. 

A rights plan like this, also known as a "poison pill", is typically a defensive tactic used by a corporation's board of directors against hostile takeovers.  Poison pills provide a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders. 

Instead, the hostile bidder is forced to negotiate with the board, and there are two key benefits for shareholders:

• Management has time to find competing offers that maximizes selling price.
• Numerous studies indicate companies with poison pills received higher takeover premiums than companies without them.

Ultimately, the goal of a rights plan is in increased shareholder value.  When the company’s directors have the hammer, it gives them increased negotiating power with any potential buyer.  The results are in higher acquisition premiums. 

Taking a close look at some of the highlights of the news release:

·         An ”Acquiring Person” must proceed either with the approval of the Board of Directors or by way of a “Permitted Bid”, which requires a take-over bid to satisfy certain minimum standards.

·         Standards require the bid be kept open for at least 60 days and, if more than 50% of the shares subject to the bid are tendered within that period, the bid must remain open for an additional 10 days to permit the other shareholders to also tender their shares.

·         If a take-over bid doesn’t meet minimum standards and the Plan is not waived by the Board of Directors, shareholders other than the Acquiring Person will be able to purchase additional shares at a significant discount to market, thus exposing the Acquiring Person to substantial dilution of its holdings.

I have been down this road with a number of companies.  For me, the most important point is the last one—the "flip-in" provision.  This type of provision gives current shareholders of a targeted company, other than the hostile acquirer, rights to purchase additional shares in the targeted company at a discount.
 

By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the hostile acquirer.  This makes the takeover attempt more difficult and more expensive.

In closing I reiterate the three key aspects of any successful junior: Projects with world-class potential, People with technical skills and a background of repeated success in exploration, development and transactions, and a well-managed share structure. 

Anyone who takes a good close look at Petro One’s corporate presentation and knows the projects and share structure are exceptionally sweet.  But today’s bitter poison pill is the proof I need that management is building another winner.