Talon Energy Ltd (ASX:TPD) and TMK Energy Ltd have agreed to consolidate the ownership of the Gurvantes XXXV coal seam gas project in Mongolia, which will see TMK acquire Talon's 33% earned interest in the project through the purchase of Talon's wholly-owned subsidiary, Talon Energy Pte Ltd.
Both parties have executed a binding heads of agreement for the transaction described as a “logical transaction and compelling opportunity” to create shareholder value.
What’s in the agreement
The gross consideration for Talon's earned rights will involve up to 1.10 billion fully-paid ordinary shares in TMK and up to 550 million listed options in TMK, which will be distributed to Talon shareholders following completion of the transaction.
This implies an approximate value of $0.020 per Talon share, equating to about 1.56 times TMK shares per Talon share held and 0.78 times TMK options per Talon share held.
Following settlement of the transaction, Talon will undertake an in-specie distribution of up to 1.009 billion TMK shares and 504.5 million TMK options to Talon shareholders, while retaining about 90.982 million TMK shares and 45.491 million TMK listed options for distribution to advisers as transaction expenses.
Further, Talon has agreed to commit up to A$850,000 in cash, minus costs related to the transaction, to meet its obligations to fund the project’s expenditure and commitments between September 1 and completion of the consolidation.
Alternative scenario
The Talon board weighed the proposed consolidation against both the de-merger and spin-out scenarios for shareholders but decided in the end that the consolidation offered a far more superior proposition.
One of the key factors that was considered was the material uncertainty as to whether the spin-out entity would be successfully listed on the ASX, and therefore, any spin-out entity would have initially been an unlisted, public company needing internal project funding.
Hence, the board has unanimously recommended that Talon shareholders vote in favour of the proposed consolidation, while individually expressing their intention to support it at an extraordinary general meeting scheduled for late next month.
Unlocking synergies
“This consolidation is a logical transaction and compelling opportunity to create value for both sets of shareholders by unlocking important synergies in the exploration and development of the Gurvantes Project,” Talon managing director Colby Hauser said.
“Assuming the TMK transaction completes, Talon shareholders will continue to have a material interest in the upside associated with Gurvantes, while at the same time mitigating the liquidity and funding risks that would have existed in the unlisted spin-out structure.
“The Talon board believes that the TMK transaction is in the best interests of Talon shareholders and unanimously recommends it to our shareholders.”
Lending support
The transaction is contingent upon several conditions, including securing approval from TMK shareholders for issuing shares and listed options, obtaining approval from Talon shareholders for the in-specie distribution, and securing all necessary corporate and regulatory approvals, consents and waivers for the transaction's completion.
TMK’s largest shareholder, Tsetsen Zantav, who holds a 32.06% interest, has confirmed that he intends to vote in favour of the proposed consolidation, as have all TMK directors at the upcoming shareholders’ meeting.
An investor webinar will be held in the coming days to offer further insights into the transaction and an update on the progress of the proposed scheme of arrangement between Talon and Strike Energy Ltd (ASX:STX).