Shareholders of oil and gas exploration and production company, Aurora Oil and Gas Limited (ASX: AUT) will be delighted with the recent announcement that Canadian oil and gas company Baytex Energy Corp. (NYSE: BTE) has proposed an all cash $4.10 per share takeover bid, representing a 52% premium to Aurora's one-week Volume Weighted Average Price (VWAP) of $2.69.
The proposal is via a Scheme of Arrangement, which the Directors have supported in the absence of a better (competing) offer, whilst noting that this support is also subject to an Independent Expert's report. The proposed Scheme still needs to jump through several hoops before being implemented, including shareholder, court and Foreign Investment Review Board approval, with shareholders due to vote on the proposed Scheme of Arrangement at the end of April or early May 2014.
Aurora's share price is currently sitting at $4.12, which is 57% above the $2.62 pre-offer price and 0.5% above Baytex's current offer. The market seems to be pricing in some possibility that greater value can be obtained.
A few points regarding this deal strike me as particularly pertinent for investors.
Baytex's offer is not subject to due diligence: Baytex has already had a good look at Aurora's "books" and determined this offer price. Given that due diligence proceedings sometimes result in potential acquirers walking away (such as in the case of Billabong International (ASX: BBG)), this is a good sign that the "deal has legs".
Baytex's offer is fully funded: Baytex's offer is underpinned by a fully underwritten capital raising (for $1.3 billion in Canadian dollars) with bridge financing in place should a contingency funding model be required. This basically means that Baytex has the necessary means to make good on its offer.
Independent expert's report due: Investors will note that final approval for the scheme is subject to an independent expert's report, which will give investors more information on whether the bid represents fair value for shareholders.
Potential for a competing bid: Although the Baytex offer was a significant premium to Aurora's current share price, there is every chance that a competing offer could emerge, with speculation that Marathon Oil (NYSE: MRO) is considering taking action. Marathon is the joint venture operator of Aurora's shale assets. Aurora's share price is currently sitting at $4.12, or 0.5% above the Baytex offer of $4.10, indicating that the market also believes that further activity to the upside could eventuate. However, readers will note that the Australian Financial Review reports that UBS has cut its rating of Aurora to a "sell".
Foolish takeaway
So what should investors do? Aurora's share price is looking quite expensive to me, and to buy in now would be risky given the current offer was a significant uplift to its pre-takeover offer share price. The upside potential could come from two avenues: the first being the independent expert's report, which could value Aurora's share price at a higher range, and the second being that a competing offer could emerge.
Although there is every chance that the report could justify a higher share price or Marathon Oil (or another party) could weigh in with a competing offer, investors should consider the potential risks to buying now. If the Baytex offer falls through, the share price could potentially drop back to its previous share price of $2.62. Given the risks and potential upside, Aurora's share price is looking quite expensive to me, especially given it is above Baytex's current "bird in the hand" offer.
Having said this, the Baytex offer came off the back of Aurora's significant upgrade to production and reserves in January 2014. Clearly Baytex is acknowledging the potential that is held within Aurora Oil and Gas. Readers can find out more about Aurora's positive qualities here and here.
