US Edition Venture Production
828½p +43½p
Questor says HOLD
Centrica has launched a hostile bid for Venture Production at 845p a share after it bought 3i's stake and agreed to buy the private-equity group's stake in a convertible bond. The offer is only 8pc above the price Questor recommended buying the shares, which is not a disaster, but it would have been nice if it was higher. So, what do investors do now?
Well, now it becomes a waiting game. Centrica has been categorical in saying that it would not raise the offer for the group above the current level. It is possible that a white knight could emerge and counter-offer for the group. However, with Centrica's stake now at just under 30pc it could easily block the move. This makes the chance of a counterbid less likely.
Two major shareholders have said they will not be selling. Larry Kinch, who owns 7.4pc of the group, argued that much of the value in Venture had still be to be realised and said that £10 a share was a more appropriate figure. Mr Kinch was one of the founders of the company in 2007. The second, ArcLight Capital Partners, represents shareholders with 5.4pc of the company. It argued that it was an "opportunistic attempt by Centrica to exploit the short-term weakness in the financial and commodity markets as well as the financial and management pressures on certain of Venture's other significant shareholders". Questor interprets this last statement as a nod to the sale by 3i.
Venture argues that the offer "substantially" undervalued its business, given its near- and long-term prospects and the strategic position and high quality of its UK gas reserves and resources.
The main argument for undervaluation concerns the company's recent sale of some assets in the southern North Sea to Nuon Energy. The sale took place at about $17 a barrel of oil equivalent, while Centrica's offer values Venture at about $10 a barrel of oil equivalent of reserves. The company also points to its drilling programme over the next six months, which could increase its reserves substantially. The group plans to drill a number of wells in the North Sea and east Irish Sea.
By amassing its near-30pc stake, Centrica has placed itself in a strong position. This could discourage any potential bidders from charging in on their white steed. Management has been categorical in the view that the 845p bid undervalues the company – arguing it can realise better value for shareholders elsewhere.
There is also the question of gas prices, which remain subdued. It is said that gas prices are lagging behind crude prices by about nine months, and Questor is sure they will eventually recover. This is another long-term positive for Venture as a stand alone company – and the reason why Centrica wants to buy the group. The British Gas owner needs to buy production assets to act as a hedge against future price rises. If it did not see prices rising in the future, there is little point in making a bid for Venture in the first place.
From a private investor point of view it is now a waiting game. We need to see whether Venture's board can convince remaining shareholders that they will have better value if the company stands alone. However, this could create problems with the management of the company and its major shareholder being at loggerheads. It is also important to point out that Centrica has not performed due diligence on the group. Coming in with an offer when due diligence has not been performed would mean a company errs on the conservative side otherwise it would be irresponsible.
Questor advises holders of the shares to do nothing at the moment and to see how the deal progresses.
The shares are trading below Centrica's offer price, so the market is not pricing in a done deal for Centrica. If the offer does not happen, the shares are likely to fall – but the business is sound, well managed and strategically important to the UK. For now, the stance is hold.
Cranswick
610p +6½p
Questor says BUY
The swine flu epidemic appears to have had little effect on sales at pork group Cranswick and the company tabled an excellent first-quarter update. Questor is bullish on food producers and agriculture in general and the shares are still rated as a buy.
Cranswick said that net debt had fallen to £64m from £66.6m at the end of March and sales are up an all businesses except its sandwich operations. Rising sales and falling debt are a good sign in current markets. Sales from continuing businesses rose 11pc to £167m, although the company noted that raw material prices remained high. This will have to be passed on to the consumer as cost pressures are likely to persist.
The company is cash generative and is well positioned in its market after the recent purchase of rival Bowes and the disposal of its pet food business. The company is a supplier to major supermarket groups such as Ahold in Europe, but the purchase of Bowes was a canny move as it brought Tesco into its customer base.
The shares are up just 2pc since their recommendation, but have started trading excluding the rights to the 14.7p dividend to be paid in September. They are trading on a March 2010 earnings multiple of 9.9 times, falling to 9.2 times next year. The shares are yielding 3.7pc, which looks secure because of the group's good cash generation. Buy.