FTO.L Regulatory News (FTO)

7 August 2013

Fortune Oil PLC

("Fortune Oil" or the "Company")

Proposed Acquisition and Loan Settlement

Proposal to seek a waiver of an obligation to make a general offer under

Rule 9 of the Takeover Code

and

Proposed Special Interim Dividend

Summary

The Company is pleased to announce that it will be putting inter-conditional proposals to shareholders in General Meeting as follows:

·; The acquisition of Wilmar International Limited's interest in the consideration receivable as a result of the conditional disposal of Fortune Gas Investment Holdings Limited. The total consideration is US$60m payable to Fortune Dynasty Holdings Limited, a member of the Concert Party (described below), in Ordinary Shares in Fortune Oil (the "Proposed Acquisition") 

·; Subject to the waiver from the Takeover Panel described immediately below, amendment of a loan received from Fortune Dynasty Holdings Limited amounting to US$12m, such that it will be repayable in shares in Fortune Oil (the "Loan Settlement")

·; Waiver to be sought from the Takeover Panel, and of shareholders, of the requirements of Rule 9 of the Takeover Code for a general offer to be made for the Company by parties (the "Concert Party") who, by receiving Ordinary Shares through the Loan Settlement and the Proposed Acquisition, would own more than 56.9% of the Company's issued share capital

·; Proposed special interim dividend of 2.36 pence per Ordinary Share (the "Special Dividend")

 The Company intends, subject to approval by the Panel, to send a circular to shareholders (the "Circular") providing information about the Proposed Acquisition, the Loan Settlement, the Special Dividend and members of the Concert Party, convening a general meeting of the Company at which the Rule 9 Waiver resolution and the payment of the Special Dividend will be put to a vote of the shareholders of the Company. The date of the general meeting of the Company has not yet been set but it will be held as soon as practicable.

Tee Kiam Poon, Chief Executive of the Company, commented:

"The proposals set out in this announcement, as explained more fully in the section entitled 'Reasons for the proposals', are designed to ensure that the Company receives maximum value for the sale of Fortune Gas Investment Holdings Limited, whose growth will be to the benefit of all shareholders. It is very important that appropriate investment is made in this asset while we await completion of its sale and these proposals, once implemented, will achieve that. It is expected that these proposals will ultimately provide additional sources of demand for, and improve the marketability of, the Ordinary Shares of Fortune Oil. We are also very pleased to announce that shareholders will receive a special dividend, which recognises the strength of the business and the long term potential of its strategy. The Board is grateful to all shareholders for their continued support."

Background

The Company announced on 17 December 2012 that it had reached a conditional agreement (the "Fortune Gas Sale Agreement") for the disposal of its natural gas business, Fortune Gas Investment Holdings Limited ("FGIH"), owned 85 per cent. by the Company and 15 per cent. by Wilmar International Limited ("Wilmar"), to China Natural Gas Investment Limited ("CGI"), a subsidiary of China Gas Holdings Limited ("China Gas"), for a total consideration of US$400 million, comprising US$200 million upon completion of the Fortune Gas Sale Agreement and a further US$200 million of deferred consideration (the "Deferred Consideration"). On 27 June 2013, due primarily to a delay in receiving approval from the Anti-Monopoly Bureau of the Ministry of Commerce of the People's Republic of China ("MOFCOM"), the Company announced that it, Wilmar and CGI and the other parties to the Fortune Gas Sale Agreement had entered into a supplementary agreement to extend the date by which the conditions of the Fortune Gas Sale Agreement must be satisfied from 30 June 2013 to 30 September 2013. The Company has not yet been informed of when the Fortune Gas Sale Agreement might be approved by MOFCOM but has been told the process of application has been processing smoothly and efficiently. However, it might still take the Company some time to go through the normal handover procedures to complete the transaction even after MOFCOM approval and, as a consequence, the Company has considered how best to manage these circumstances, which has led to the proposals set out below. Further background is provided in the paragraph entitled 'Reasons for the proposals' below. 

By written notice to CGI between 1 November 2013 and 31 December 2013, the Company (through its subsidiary Fortune Oil PRC Holdings Limited) may elect to receive the Deferred Consideration by way of shares in China Gas in accordance with the terms of the Fortune Gas Sale Agreement. The issue of shares in China Gas as the Deferred Consideration is subject to approval of the board of directors of China Gas and listing permission from the Hong Kong Stock Exchange. Where the Company does not exercise the right, or where the right is exercised but the conditions for the issue of shares in China Gas are not satisfied, such cash amount (being the Deferred Consideration plus interest) will be payable within 30 days of either 31 December 2013 or the date on which China Gas is aware that one or both of the conditions are not satisfied, respectively.

Wilmar entered into an agreement with First Marvel Investment Limited ("First Marvel"), effective as of 23 July 2013, pursuant to which, for cash consideration of US$60 million, First Marvel agreed to accept all the rights and benefits and to perform and discharge all liabilities and obligations of Wilmar under the Fortune Gas Sale Agreement (to the extent relating to the period after completion of such agreement).

First Marvel is a wholly-owned subsidiary of Fortune Dynasty Holdings Limited ("FDH"). FDH is a joint venture company owned 55 per cent. by First Level Holdings Limited, a company controlled by Daniel Chiu, executive vice chairman and a director of the Company, and 45 per cent. by Vitol Energy (Bermuda) Limited, a member of the Vitol Group of companies of which Ian Taylor, a non-executive director of the Company, is president and chief executive officer.

The Company entered into a deed of assignment and novation on 6 August 2013 between the parties to the Fortune Gas Sale Agreement and First Marvel under which the rights and obligations of Wilmar under the Fortune Gas Sale Agreement were assigned and novated to First Marvel effective as from completion of the Fortune Gas Sale Agreement.

The Proposed Acquisition, the Loan Instrument and the Loan Settlement

On 7 August 2013, the Company entered into a sale and purchase Agreement (the "SPA") and an unsecured fixed rate loan note instrument (the "Loan Instrument") with FDH.

Under the SPA, the Company has conditionally agreed to purchase from FDH the entire issued share capital of FDH's wholly-owned subsidiary, First Marvel, for a consideration of US$60 million (the "Proposed Acquisition"). The consideration payable by the Company for First Marvel will be satisfied by the issue to FDH of 500,266,580 new ordinary shares of 1 penny each in the share capital of the Company ("Ordinary Shares") at an issue price of 7.81 pence per Ordinary Share. The SPA is conditional upon, among other things, the passing of the Rule 9 Waiver resolution (as described below). 

Under the Loan Instrument, FDH has agreed to subscribe in cash at par for US$12 million nominal amount of fixed rate unsecured loan notes issued by the Company (the "Loan Notes"). The Loan Notes have a maturity date of 7 February 2014. Interest is payable on the Loan Notes at a rate of 7 per cent. per annum (with an additional 2 per cent. in respect of default interest), such interest accruing daily and calculated on the basis of a 365-day year. The proceeds of the Loan Notes will be used for near-term capital expenditure and for general working capital purposes. The Loan Notes are repayable in cash. 

The Company and FDH propose, subject to the Panel agreeing to waive the requirements of Rule 9 of the Takeover Code and the passing of the Rule 9 Waiver resolution, to modify the Loan Instrument to provide that the Loan Notes be settled by the issue of Ordinary Shares (the "Loan Settlement"). Upon the passing of the Rule 9 Waiver resolution (as described below), in accordance with the Loan Settlement the Company will be obliged to redeem all the Loan Notes by issuing in exchange for the principal amount of such redeemed Loan Notes 99,373,000 Ordinary Shares at an issue price of 7.81pence per Ordinary Share (the same issue price as for the Ordinary Shares issued in connection with the Proposed Acquisition described above). All accrued interest on the redeemed Loan Notes at the date of such redemption will be paid in cash to the holders of the Loan Notes. If the Rule 9 Waiver resolution (as described below) is not passed then the Proposed Acquisition will not occur, the Loan Instrument will not be amended and the Company shall redeem the outstanding Loan Notes in cash at par together with accrued interest (including any accrued default interest and, in so far as required, after deduction of tax) in accordance with the terms of the Loan Instrument.

The proposal to seek a waiver of Rule 9 of the Takeover Code

The City Code on Takeovers and Mergers (the "Takeover Code") is issued and enforced by the Panel on Takeovers and Mergers (the "Panel"). The Panel has been designated as the supervisory authority to carry out certain regulatory functions in relation to takeovers pursuant to the EU Takeover Directive (2204/25/EC). Its statutory functions are set out in and under Chapter 1 of Part 28 of the Companies Act 2006, under which the Company operates.

Under Rule 9 of the Takeover Code, any person who acquires an interest (as defined under the Takeover Code) in shares which, taken together with shares in which he is already interested (and in which persons acting in concert with him are interested), carry 30 per cent. or more of the voting rights of a company, is normally required by the Panel to make a general offer in cash to the shareholders of that company to acquire the balance of the shares not held by such person (or group of persons acting in concert) at not less than the highest price paid by him (or any persons acting in concert with him) for any such shares within the 12 months prior to the announcement of the offer.

In addition, Rule 9 of the Takeover Code provides that, when any person (together with any persons acting in concert with him), is interested in shares which in aggregate carry not less than 30 per cent. of the voting rights of a company, but does not hold shares carrying more than 50 per cent. of such voting rights, and such person (or any such person acting in concert with him) acquires an interest in any other shares which increases the percentage of shares carrying voting rights, that person (together with any persons acting in concert with him) is normally required by the Panel to make a general offer in cash to the shareholders of that company to acquire the balance of the shares not held by such person (or group of persons acting in concert) at not less than the highest price paid by him (or any persons acting in concert with him) for any such shares within the 12 months prior to the announcement of the offer.

For the purposes of the Takeover Code, a concert party arises where persons acting in concert pursuant to an agreement or understanding (whether formal or informal) co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company.

Daniel Chiu, Dennis Chiu, First Level Holdings Limited, FDH and Vitol Energy (Bermuda) Limited are deemed to be acting in concert in relation to the Company (the "Concert Party"). The members of the Concert Party are currently interested in an aggregate of 872,744,117 Ordinary Shares, representing approximately 43.9 per cent. of the voting rights of the Company. The issue of new Ordinary Shares to FDH pursuant to the Proposed Acquisition and the Loan Settlement would normally result in an obligation on the Concert Party to make a general offer for the Company, pursuant to Rule 9 of the Takeover Code. Accordingly, the Company will be seeking the agreement of the Panel to waive the obligation to make a general offer that would otherwise arise as a result of the issue of new Ordinary Shares to FDH pursuant to the Proposed Acquisition and the Loan Settlement (the "Rule 9 Waiver"). The agreement of the Panel will be subject to the approval of independent shareholders on a poll in general meeting of the Company. The Rule 9 Waiver resolution will require the approval of a simple majority of votes cast on that poll and only independent shareholders will be entitled to vote on the Rule 9 Waiver resolution. 

If the Panel agrees to the Rule 9 Waiver and if the Rule 9 Waiver resolution is passed by independent shareholders in general meeting, following the issue of Ordinary Shares in connection with the Proposed Acquisition and the Loan Settlement, the Concert Party will control approximately 56.9 per cent. of the Ordinary Shares and hence will have the ability to increase its interests in the issued share capital of the Company without having to make a general offer for the Company under Rule 9 of the Takeover Code. In addition, Daniel Chiu and First Level Holdings Limited will control approximately 51.2 per cent. of the Ordinary Shares following the issue of Ordinary Shares in connection with the Proposed Acquisition and the Loan Settlement and will be free to increase their interests in the issued share capital of the Company without incurring an obligation to make a general offer for the Company under Rule 9 of the Takeover Code. Other members of the Concert Party will individually continue to be subject to obligations under Rule 9 of the Takeover Code unless the Panel consents to waive those obligations in accordance with Note 4 to Rule 9.1 of the Takeover Code.

The Special Dividend

Subject to completion of the Fortune Gas Sale Agreement (as assigned and novated in the manner described above) and the Proposed Acquisition, the issuance of the new Ordinary Shares in connection with the Proposed Acquisition and the Loan Settlement and the passing of the Rule 9 Waiver resolution, the directors of the Company will recommend that the Company pay a special interim dividend of 2.36 pence per Ordinary Share to be paid to all shareholders of the Company (the "Special Dividend"). The Ordinary Shares to be issued in connection with the Proposed Acquisition and the Loan Settlement will not be entitled to the Special Dividend. 

The Company intends, subject to approval by the Panel, to send a circular to shareholders (the "Circular") providing information about the Proposed Acquisition, the Loan Settlement, the Special Dividend and members of the Concert Party and convening a general meeting of the Company at which the Rule 9 Waiver resolution and the payment of the Special Dividend will be put to a vote of the shareholders of the Company. The date of the general meeting of the Company has not yet been set but it will be held as soon as practicable.

In accordance with the relevant rules of the Financial Conduct Authority, the Company will also be publishing a prospectus in relation to the admission of the new Ordinary Shares to be issued in connection with the Proposed Acquisition and the Loan Settlement to the standard segment of the Official List and to trading on the London Stock Exchange's main market for listed securities. 

In accordance with the Takeover Code, a committee comprising members of the board of directors of the Company who are independent of members of the Concert Party (the "Independent Directors") has been formed to consider the Proposed Acquisition, the Loan Settlement and the Rule 9 Waiver. VSA Capital Limited, which is regulated and authorised by the Financial Conduct Authority and is a member of the London Stock Exchange, has been appointed to provide advice to the Independent Directors in accordance with the requirements of paragraph 4(a) of Appendix 1 to the Takeover Code.

Reasons for the proposals

As a result of the delay in completion of the Fortune Sale Gas Agreement, the Company must continue to fund the working capital needs of the FGIH, including certain material near term capital expenditure necessary to progress FGIH with a view to achieving the minimum profits guaranteed by the Company under the Fortune Gas Sale Agreement. The proceeds from the issue of the Loan Notes will provide the funding for these and other items of near term capital expenditure as well as additional working capital. If the Company were to fail to maintain the performance of FGIH through appropriate capital investment, this would negatively impact the performance of FGIH and, ultimately, the consideration receivable from China Gas. This would not be in the best interests of shareholders. The Loan Settlement is being proposed as an integral part of the proposals made by the Concert Party to demonstrate Daniel Chiu and Vitol Energy (Bermuda) Limited's confidence in the Company (as described further below).

In early 2012, the Company, together with Liu Ming Hui, established a 50:50 joint venture, China Gas Group Limited ("CGGL"), to invest in China Gas. CGGL currently holds approximately 14.66 per cent. of the issued share capital of China Gas. In his personal capacity, Liu Ming Hui also holds approximately 6.45 per cent. of the issued share capital of China Gas, meaning that the Company and Liu Ming Hui, who are considered to be acting in concert in relation to China Gas under the applicable Hong Kong Stock Exchange rules, are collectively interested in approximately 21.11 per cent. of the issued share capital of China Gas.

The Company's relationship with China Gas, one of the largest natural gas businesses in China, has provided and is expected to continue to provide significant benefits to the Company. Subject to various considerations, including market conditions, the Company expects to elect to receive the Deferred Consideration due under the Fortune Gas Sale Agreement in shares in China Gas, thus adding to its significant shareholding in China Gas. Completion of the SPA would enable the Company to increase its interests in China Gas further still by acquiring the US$30 million of shares in China Gas which Wilmar would otherwise be entitled to receive under the Fortune Gas Sale Agreement.

The SPA, the Loan Instrument and the Loan Settlement demonstrate both the continued support of Daniel Chiu and Vitol Energy (Bermuda) Limited, who were involved in the creation of the Company and have been key to its development for over 20 years, and their confidence in the future of the Company. If shareholders approve the Rule 9 Waiver, following completion of the SPA and the Loan Settlement, the members of the Concert Party will, subject always to the provisions of the Code, have the freedom to increase their interests in the issued share capital of the Company. Whilst this would inevitably reduce the free-float in the Ordinary Shares, it is expected that these developments will provide additional sources of demand for and improve the marketability of the Ordinary Shares.

Completion of the SPA and the Loan Settlement will also significantly strengthen the balance sheet of the Company and will allow the Company to pay the Special Dividend, which should be attractive to shareholders and reward them for their loyal support of the Company.

Background on Fortune Oil

Fortune Oil is a leading independent energy company engaged in the investment and operations of oil and natural gas supply projects in the People's Republic of China (the "PRC"). Fortune Oil has acquired a unique portfolio of high quality oil and natural gas projects across the country and has formed a strong partnership with domestic and international market leaders. Fortune Oil recently started an expansion outside the PRC securing resource projects. Fortune Oil is listed on the Main Market of the London Stock Exchange with its operational headquarters in Hong Kong.