A cautionary tale
The hostile takeover of Grey Wolf Exploration provides a
hard lesson for minority shareholders
There have been a fair
number of hostile
takeovers in the oil patch
in recent years, but the
one involving
Calgary-based Grey Wolf
Exploration Inc. last
summer takes the prize for
weirdness. The junior gas
producer, which owns land
in the rich Ladyfern play of
northeast BC, was
targeted by Abraxas
Petroleum Corp. of San
Antonio, Tex. (AMEX:
ABP) The strange part:
Abraxas helped launch
Grey Wolf, owned half its
stock, and the two firms shared a top executive. It was a bizarre
transaction that has some minority shareholders complaining of unfair
treatment.
The saga dates back to 1995, when Don Engle and Roger Bruton, a
couple of oilmen active in Calgary, hooked up with Robert Watson, the
smooth-talking Texan who runs Abraxas. Engle and Bruton had the
expertise to start a new oil and gas company, but they lacked the money.
Associates put them in touch with Watson, who was looking to invest in
Canada. Abraxas subsequently acquired 48.3% of a Canadian shell
called Cascade Oil & Gas Ltd. The name was changed to Grey Wolf,
and the partners began building the company through a combination of
acquisitions and exploration. Watson assumed the CEO mantle at Grey
Wolf in 1996 and retained his title as president of Abraxas.
Grey Wolf was successful. By last year it had pretax earnings of $6.7
million on revenue of $26 million. But the story was different for its major
shareholder during the same five-year period. Abraxas, which Watson
had started in the late 1970s, had gone on an acquisition spree financed
by high-yield debt—rarely a wise move in a volatile commodity business.
By early 1999, Abraxas was on the verge of insolvency. Creditors forced
the company to hedge its gas production to ensure it could meet interest
payments. When gas prices soared last year, the hedging caused
Abraxas to miss out on US$20 million in potential revenue.
Watson and the Abraxas board apparently saw Grey Wolf’s healthy
balance sheet as a way out. In August, the US firm offered 0.6 of an
Abraxas share for every Grey Wolf share it didn’t already own. But a
fairness opinion by Raymond James & Associates Inc. concluded it was
a bad deal for Grey Wolf shareholders. The investment bank said Grey
Wolf shares were worth considerably more (0.81 to 0.87 of an Abraxas
share). It was also pointed out that Abraxas was in a precarious position
because of its liabilities, and might not be able to refinance debt
obligations in 2003 and 2004 without significant equity dilution.
Questions were also raised about the value of proven undeveloped
reserves held by Abraxas.
Grey Wolf’s board was divided over the bid, so Abraxas went hostile,
taking the matter directly to the shareholders. Because it already held
roughly half the shares and because the stock was relatively illiquid,
many Grey Wolf shareholders felt they had little choice but to tender.
They’re not happy about it, though. “We got screwed,” says one former
Grey Wolf investor. “It’s not even clear Abraxas will survive.” Abraxas was
recently trading at US88¢, 84% off its 52-week high.
...cont'd
The lowball offer by
Abraxas was especially
galling for investors
because, at the time,
Canadian natural gas
producers were being
snapped up by US firms at
record prices. A Calgary
analyst who was present
at the final Grey Wolf
annual meeting says
Watson arrogantly
dismissed concerns
raised by shareholders. “It
was a Gong Show,” says
the analyst. “Watson
brushed everything off by saying he couldn’t talk about it. His basic
message was, ‘If you don’t like it, too bad. Sell the stock.’ The amazing
thing is, Abraxas was essentially bankrupt. How the hell they got out of
this one, I’ll never know.”
At the end of September, about 90% of Grey Wolf’s outstanding shares
had tendered to the Abraxas bid, and it’s not likely the disgruntled
holders of the remaining 10% will get anywhere with their complaints. But
they’ve learned an important lesson: never invest in a small company that
is tightly controlled by one individual or company, unless you have
complete confidence that your money is in good hands. As for Watson,
he admits the combined company is still over-leveraged—and hopes a
sale of assets will put the books in order.
canadianbusiness.com
Pretty sad eh ... i don't think the people we knew would have let this happen ... remember that December, i think it was '96, when Cascade got written up in the Globe and Mail ... those were the days eh ... cheers, e |
