(After-hours update at bottom regarding that headline.)
When life gives you lemonade, dilute and drink. Or as the statement says:
Shareholders of PetroMagdalena will receive C$1.60 in cash for each outstanding Share, representing a premium of approximately 38% on the 20 day volume weighted average price of PetroMagdalena’s common shares on the TSX-V as of June 4, 2012. In addition, holders of all of the outstanding PetroMagdalena warrants (TSX-V: PMD.WT) will receive C$0.25 in cash for each unexercised Warrant held at closing. The Warrants had a closing trading price on the TSX-V of C$0.215 on June 4, 2012.
Pacific Rubiales chairmen Serafino Iacono and Miguel de la Campa owned a combined 644,857 shares of PetroMagdalena, according to PetroMagdalena’s 2011 Annual Information Form. PRE.to agreed to buy Petromagdalena for $1.60 a share, or 44 cents a share above average market price, in cash. If the deal goes through as currently structured, it will put $2.35 million of Pacific Rubiales money directly into the pockets of Iacono and de la Campa.
If these guys just wanted to take money from Rubiales, they wouldn’t be allowed to. After all, they may be chairmen of the board, but there are other shareholders to think about. But if Rubiales just happens to give a sweetheart buyout to a crappy company largely owned by these two guys? Well no problem, right?
But don’t worry, there’s no conflict of interest here. From the statement:
Both Miguel de la Campa and Serafino Iacono, directors of the Company who are also directors of Pacific Rubiales, did not participate in any discussions or negotiations regarding the approval of the proposed acquisition and abstained from the Boards’ deliberations….
Anyway, this deal just unlocks PetroMagdalena’s value. It’s really a valuable asset, and other companies may swoop in to make a superior bid. Oh wait:
…In the event of a superior proposal, Pacific Rubiales will have a five business day right to match the superior proposal. If the Arrangement is not completed as a result of a superior proposal or for other certain specified circumstances, a termination fee equal to C$10,000,000 will be paid by PetroMagdalena to Pacific Rubiales. If the Arrangement is not completed, due to certain circumstances, including a failure to receive necessary regulatory approvals, a reverse termination fee of C$10,000,000 will be paid to PetroMagdalena by Pacific Rubiales…
But the story is actually more complicated, because the chairmen aren’t actually getting rich on this deal. For example, back in April and May of 2011, Iacono paid an average 23.9 cents a share to soak up 1.9 million shares of Alange Energy, which was PetroMagdalena’s name in olden times. (That stock went through a 7 for 1 consolidation when the company became PetroMagdalena.) Rubiales is bailing out Iacono and de la Campa at the equivalent of 22.8 cents a share of old stocks, a small loss. Following the money then, one group that Rubiales is ultimately bailing out would be the Alange holders who unloaded their stock onto Iacono and de la Campa. I don’t know if any of those people signed onto the shareholder class action against PetroMagdalena, but I kinda doubt it.
In any case, they are a tiny minority of the stockholders. A much bigger group is the people who bought Alange share-and-warrant packages for 30 cents apiece in February 2011. They are coming out way ahead.
So who is hurt by all this? Maybe PRE.to retail shareholders, but if they are annoyed, they aren’t showing it in the market. Stock is up 64 cents, or 2.4%. So hey! Win-win-win.
UPDATE: I just realised the headline sounds judgmental. I want to be clear: I am saying that it looks like PRE.to’s board members are cashing out. I am NOT telling you to cash out. I have no idea of PRE.to is a good investment at this moment. And if you take investment advice from me, you deserve any financial losses you sustain. I take no responsibility. I have a hard enough time taking responsibility for my own, many, loss-making trades.