The resolutions put forward by COC include the removal of Bowleven's existing board, apart from chief operating officer David Clarkson, and its independent directors, too, to be replaced by COC's own appointed directors, who will then pursue a strategy to turn cash-rich Bowleven into a holding company for its two main assets and return some of its $95m cash pile, worth 24p a share, to shareholders. Bowleven's board believes that COC is trying to gain control of the company without making a general offer to other shareholders, with the sole purpose of stripping it of cash and leaving it as a passive investment vehicle lacking a credible strategy.
They point to their successful $250m farm-out of the Etinde permit off the coast of Cameroon, which brought in partners Lukoil and New Age at the start of 2015 and left Bowleven with a valuable 20 per cent non-operated interest, and a substantial cash pile to weather the downturn across the sector. Etinde accounts for almost half of Bowleven's book value of 90p a share, so it is a key investment and one on which Bowleven is carried for $40m of net drilling on two appraisal wells, and is due to receive a further $25m once the final investment decision is made.
COC also wants to cease investment in the company's smaller Bomono project, also off the coast of Cameroon, whereas Bowleven is pursuing a strategy to realise near-term value through commercial production, and primarily through a farm-out to minimise its future investment. The company has valuable relationships with the Cameroon government, which Bowleven's board believes would be lost, and so undermining realising value from these two assets.
Although not explicitly stated in the COC open letter to shareholders, Bowleven's board considers it reasonable to infer from the rebel shareholders' stated strategy of seeking to return cash and identifying "the route to value maximisation from Etinde over time" that it would seek a near-term buyer for Etinde rather than pursue longer-term value from the asset. In that situation, the company would be "negotiating an asset sale from a position of capital-constrained weakness".
The other major issue that has come to light through a series of public exchanges between the two parties is that Bowleven's management was approached by COC last year with a view to seeking their support for a management buyout (MBO) at a level equivalent to the cash balance of the company. Kevin Hart, chief executive of Bowleven, met with a representative of Crown Ocean Capital in mid-August, at which it was informed that a bid in the range contemplated was not worthy of recommendation to shareholders.
A cynic would say that having failed to go down the MBO route, COC is now taking the low-cost option of trying to oust the board and take control without making a formal bid for the company. It's also fair to point out that the board structure proposed is non-compliant with the UK Corporate Governance Code. The proposal to remove all the independent directors without seeking immediate replacements to protect the interests of shareholders leaves me very uncomfortable.
In the circumstances, I can't recommend voting in favour of COC's resolutions. In fact, I believe the shareholder would be better off launching a formal offer for Bowleven pitched at a level that takes into full account the chunky cash pile, and a reasonable proportion of the value in the two main assets. Analyst Daniel Slater at brokerage Arden Partners has a target price of 50p a share based on a core net asset value (NAV) of 62p a share, and a total risked NAV of 96p a share. A take-out level of that order would deliver a satisfactory bid premium, while at the same time leaving Crown Ocean Capital with further investment upside. I would therefore reject the proposals (deadline for receipt of proxy forms is 11am on Friday, 10 March), albeit I feel that Bowleven is now in play and its days as a listed entity could well be numbered.
Needless to say, having included Bowleven's shares in my 2016 Bargain Shares portfolio at 18.9p, and again at 27.75p in this year's portfolio, I maintain my buy recommendation at 33p.
Generating alpha gains
Bowleven isn't the only company I follow where the share price has been benefiting from corporate activity. The same is true of Alpha Real Trust (ARTL:112p), a company that invests in high-yielding property and asset-backed debt and equity investments in western Europe, with the aim of delivering strong risk-adjusted cash flows. I initiated coverage at 80p a year ago ('High-yield property play', 10 February 2016) and the company has not disappointed: net asset value (NAV) per share hit a record 151.9p at the end of September 2016, over 10 per cent higher than in March 2016, and 23 per cent ahead of valuations in September 2015.
A key driver behind this stellar performance has been Alpha's wholly owned H20 shopping centre in Madrid. Record footfall and a raft of tenancy renewals have driven up the value, and sterling's devaluation has had a material impact, so much so that Alpha's equity in H20 is now worth £39.1m, up from £30.9m at the end of March 2016, a sum that accounts for 56p a share of Alpha's NAV of £105m, or 151.9p a share.
However, although Alpha's share price has risen by 40 per cent since I advised buying at 80p a year ago, and is up 12 per cent since I reported on the half-year results three months ago ('Property plays', 22 November 2016), the share price discount to book value is still 26 per cent. One of the reasons for this deeper than normal discount is the fact that the company owns high-yielding debt instruments, including a subordinated five-year loan of £10.3m (including accrued interest) outstanding to small-listed property company Industrial Multi Property Trust (IMPT:310p). The loan expires in December 2018 and Alpha earns an annual coupon of 15 per cent on the debt, indicating an above-average investment risk and one that takes into account IMPT's ability to repay gross borrowings of £61.4m on its £85.3m property portfolio. Alpha also owns an 18.7 per cent shareholding, too.
IMPT in play
Bearing this in mind, IMPT has just received a cash bid worth 300p a share from FTSE 250 property group Hansteen (HSTN:116p), valuing its equity at £25.2m, and placing a value of £4.7m on Alpha's 18.7 per cent shareholding, representing a 51 per cent premium to the carrying value in Alpha's last set of accounts. Hansteen's offer is a slight premium to IMPT's adjusted NAV of 296p per share at the end of September 2016, based on a property portfolio valuation of £85.3m.
However, Alpha's directors "believe that industrial property values may have risen significantly since then". They also point out that "the offer fails to reflect the significant stamp duty land tax saving - estimated at up to £2m by Jones Lang LaSalle (JLL) - and portfolio premium benefits that were advised to IMPT by JLL in December 2016". The directors of Alpha were not consulted regarding the offer and "believe it substantially undervalues IMPT". It's hardly a surprise that Alpha wasn't consulted as it failed to vote two independent directors off IMPT's board at last month's EGM.
Still, Alpha has a point as IMPT sold three light industrial units for £1.2m in two transactions in October and November 2016, and the portfolio valuation held steady at £85.3m at the December year-end, implying a decent uplift in the final quarter, and possibly this year, too. IMPT's portfolio comprises around 50 multi-let properties offering almost 500 leasable units with a total floor area of 1.7m sq ft, all of which are located in the UK, with 86 per cent invested in light industrial property and the rest in offices. The properties offer attractively priced accommodation for local occupiers and have occupancy rates above 90 per cent, and rising. It's easy to see why Hansteen, an operator in light industrial property, is interested. It's also easy to see why investors are betting on a higher offer from Hansteen to get Alpha on the side. This is rather good news for Alpha shareholders.
Firstly, the bid for IMPT adds 2.3p a share to Alpha's NAV per share, with the prospect of additional upside in the event of a higher offer. Secondly, there is an exit fee of 2 per cent payable on repayment of the entire subordinated loan amount accrued over the five-year term. Given that Hansteen would undoubtedly redeem it as soon as possible to take advantage of its lower-cost credit facilities - it has refinanced its UK portfolio with a £330m loan facility at an all-in cost of 2.7 per cent a year - then Alpha is now guaranteed to recover all of its loan capital, and earn an exit fee for its troubles. Moreover, the company is raking in £30,000 a week in interest on the subordinated loan, so the longer it strings out the takeover situation by playing hard ball, the more it earns. From my lens, this gives Hansteen, which has 15.65 per cent backing so far for its bid, an added incentive to raise its cash offer if it fails to garner enough support with its opening shot.
Windfall gains in India
The good news for Alpha's shareholders gets better because there is potential for a windfall gain on its investment in the Galaxia project, a development site extending to 11.2 acres located in NOIDA, an established suburb of Delhi and one of the principal office micro-markets in India. That's because Alpha initiated arbitration proceedings against its joint venture development partner, Logix Group, in order to protect its Galaxia investment.
In January 2015, the Arbitral Tribunal decreed that Logix and its principals had breached the terms of the shareholders' agreement and awarded Alpha a sum of £9.2m, representing the return of its initial investment with interest and costs. This sum accrues interest at an annual rate of 15 per cent until it's repaid by Logix and is now worth £13.4m at current exchange rates. Alpha is actively seeking full recovery of the sums awarded and has a charge over the private residence of the principals of Logix.
Bearing this in mind, following a challenge of the award by Logix, the Delhi High Court has just upheld the award and dismissed the Logix petition with costs. The Galaxia investment is held in Alpha's accounts at £5.2m, or less than half the £13.4m current value of the award. If the company can recoup this sum in full, and admittedly there is no guarantee it will, then it will add almost 12p a share to Alpha's last reported NAV of 151.9p a share.
Furthermore, it's not as though Alpha's portfolio of other investments are not solid as they consist of high-yielding equity in property worth £47.2m (accounting for 44.5 per cent of the portfolio), of which the wholly owned H20 asset accounts for £39m; high-yielding debt worth £17.5m (16.5 per cent of portfolio), of which the IMPT subordinated loan accounts for £10.3m; ground rent investments worth £20.4m (19.4 per cent); and residential investments in the private rented sector valued at £7m (6.6 per cent). The cash flows and recurring revenues from these assets support a quarterly dividend of 0.6p a share.
So, with the investment risk firmly skewed to the upside, I continue to rate shares in Alpha in a positive light and have raised my target price from 120p to 130p. Buy.
MORE FROM SIMON THOMPSON...
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