RE: Glass Lewis and Co.
GLASS LEWIS' ANALYSIS
Overview
The proposed merger appears to have come about after several months of talks and discussions among the various
parties. In early August 2012, the board and management team of Pace began to consider and discuss a number of
potential strategic initiatives to benefit long-term shareholder value, including a potential merger with Charger. Between
late-August and late-October 2012, the Pace board held a number of meetings to discuss potential transactions and
reviewed several informal proposals. Soon afterwards, the Pace board decided to undertake a more formal sale process
and thus directed its adviser to contact third parties to gauge their interest in a potentialstrategic transaction with the
Company. By late-November 2012, the Company had narrowed its evaluation down to three non-binding proposals,
including one from AvenEx and Charger. On November 27, 2012, AvenEx and Charger submitted an improved offer,
which led the Company to agree to negotiate exclusively with AvenEx and Charger for a three-week period. After further
discussions and due diligence activities, on December 20, 2012, AvenEx, Charger and Pace executed the arrangement
agreement and issued a joint press release announcing the deal.
It should be noted that two of the Company’s directors (Tom Buchanan and Mike Shaikh) are also directors on the board
of Charger, with Mr. Buchanan also being the current chairman and CEO of Charger. The Company states that it initially
formed an independent board committee to consider strategic options for the Company. The independent committee was
later disbanded in order to allow the entire board to take part in the sale process. However, the Company does indicate
that from late-November 2012 to the announcement date of the deal, Messrs. Buchanon and Shaikh abstained from
attending and voting at Pace board meetings relating to the proposed merger transaction. It’s also worth noting that
Messrs. Buchanon and Shaikh attended Charger board meetings where the proposed transaction was considered, but
they abstained from voting on any such matters at those meetings. In our view, Charger and Pace appear to have taken
acceptable steps to address the potential board conflicts here.
Strategic Rationale
The proposed merger is expected to result in a combined company with a diversified production base of crude oil and
natural gas. In particular, the Company estimates that Spyglass’ production capability will be approximately 18,000
barrels of oil equivalent per day, with approximately 55% weighted to natural gas and the remaining 45% to crude oil and
natural gas liquids. The board believes that the combined company will be able to achieve certain cost synergies through
reductions in general and administrative expenses. The combined company is also expected to be able to achieve
efficiencies of approximately C$25,000 (US$25,292) per barrel of oil equivalent per day through the contemplated capital
and development program for 2013. Moreover, the board believes that the combined company will have the ability to pay a
sustainable cash dividend to shareholders.
Financial Considerations
PCE February 19, 2013 Merger Proxy 4 Glass, Lewis & Co., LLC
On the financial side, the Company's financial adviser, National Bank Financial Inc., has rendered an opinion to the board
stating that the proposed consideration is fair, from a financial point of view, to the Company's shareholders. However, to
the best of our knowledge, the Company does not disclose the specific details of the analyses conducted by the adviser,
making it difficult for shareholders to ascertain how and why the adviser reached its conclusion.
We conducted our own analysis by reviewing the relative historical financial contributions of each of AvenEx, Charger and
Pace to certain of the combined company's financial and industry-specific operating measures, as shown in the table
below:
NOTE: For the purposes of this analysis, the selected financial and operational figures for AvenEx have been adjusted to exclude the results of: (i) the Elbow River Marketing
Business; (ii) AvenEx’s real estate division (discontinued operations); and (iii) certain oil and gas assets sold by AvenEx on November 26, 2012.
Our contributions analysis indicates that Pace will contribute a relatively high percentage of financial and operating
resources to the combined company relative to its implied ownership stake. In Particular, based on our selected
measures, we find that Pace’s range of financial and operational contributions to the combined company (51.0% to 72.7%)
exceeds Pace’s implied ownership of the combined company (47.9%). Thus, our analysis suggests that the deal may not
be particularly attractive to Pace on a contributions basis.
PCE February 19, 2013 Merger Proxy 5 Glass, Lewis & Co., LLC
We also compared the unaffected trading multiples of AvenEx, Charger and Pace to those observed in a selected peer
group, as shown in the table below:
Source: S&P Capital IQ
NOTE: EBITDAX is equal to EBITDA plus exploration and drilling costs. Peer group comprises the following 10 Canadian-listed firms in the crude petroleum & natural gas
industry: (i) Angle Energy, Inc.; (ii) Artek Exploration Ltd; (iii) Crocotta Energy Inc.; (iv) Delphi Energy Corp.; (v) Insignia Energy Ltd; (vi) Petrobank Energy and Resources,
Ltd.; (vii) Surge Energy Inc.; (viii) Winstar Resources Ltd.; (ix) Yangarra Resources Ltd.; and (x) Zargon Oil & Gas Ltd.
We see that Pace had been trading reasonably in line with the peer group on a trailing EBITDAX basis. In comparison,
the unaffected trailing EBITDAX multiples of both AvenEx and Charger exceeded the peer trading range.
We believe that our concerns may be further validated by Pace’s stock price movement following the announcement of
the deal. For the period between December 19, 2012 and February 5, 2013, we note that Pace’s stock price has fallen by
approximately 8.2%, which is better than the market-cap weighted, dividend-adjusted return of the peer group (-15.6%)
but worse than the return of a comparable industry index (2.2% by the Nasdaq Canada Oil & Gas Index) over the same
period (source: S&P Capital IQ).
It's worth noting that the Company does not currently pay dividends to shareholders. Comparatively, the combined entity
is expected to pay a monthly dividend of C$0.03 (US$0.03) per Spyglass share for at least the six-month period
immediately following the completion of the merger. However, to the best of our knowledge, the Spyglass board has not
provided any indication that it will continue paying a consistent dividend following the initial six-month period.
Other Factors
In our view, the aggregate termination fee potentially payable by Pace of C$9.0 million (US$9.11 million) is relatively
reasonable, as it only represents approximately 2.4% of the Company’s unaffected enterprise value and approximately
2.5% of the unaffected combined enterprise value of AvenEx and Charger. Further, we believe that the aggregate value of
accelerated equity awards and change in control payments to the Company’s directors and executives, totaling
approximately C$5.5 million (US$5.59 million), is acceptable, as such payments represent approximately 3.5% of Pace’s
unaffected equity value.
Conclusion
After review, we question whether the proposed merger, as currently outlined, truly represents the greatest value for Pace
and its shareholders. While the three way tie-up may represent the greatest opportunity for the Company, based on our
contributions analysis, the implied pro forma ownership stake of Pace shareholders in Spyglass would be less than the
value of the resources that it would likely contribute to the combined company. This issue is further compounded by the
fairly complex nature of the proposed transaction, as having three merging entities for a single transaction (along with a
pending sale of certain assets from one of the parties) could, in our view, make it more difficult for shareholders to ascribe
a clear implied deal valuation to each of the respective entities. Moreover, the Company has not, to the best of our
knowledge, publicly disclosed any sort of financial analysis that would justify the proposed transaction from the
perspective of Pace shareholders.
Taking these factors together in the aggregate, we do not believe that shareholders would be well served supporting the
proposed transaction at this time.
Accordingly, we recommend that shareholders vote AGAINST this proposal.
PCE February 19, 2013 Merger Proxy 6 Glass, Lewis & Co., LLC
There is more detail in their presentation, notable for me being that I appear to among the top 20 shareholders of this company. I voted no. Of course, this is somewhat academic, presently, as telephone and internet voting ended at noon today. Await the outcome with interest. WKH