Don't bet on Twin Butte Energy deal passing unless terms are changed

Here's a prediction that's virtually guaranteed to come home to roost.

Unless common sense prevails or unless the terms of the acquisition of Twin Butte Energy by Singapore-based Reignwood Resources Holding are changed, the transaction will not get over the line at next week's special meeting.

The reason for the confidence behind that prediction: the transaction is firmly opposed by a group of debenture holders — who collectively invested $85 million in an issue completed in late 2013 — and who more than likely have enough support to block the deal. Under the terms of the arrangement between buyer and  seller, support from two thirds of the holders of Twin Butte's common shareholders and its debenture holders is required. Getting two-thirds is more complicated when voting is not required and when the bulk of the owners are retail investors.

And its more complicated when there is sustained, determined and well-organized opposition to the offer from a group of investors who argue they have right on their side. The group, led by Vancouver-based Bockhold Investment Management Group, has retained a financial adviser (Macquarie Capital Markets) and a legal adviser (Bennett Jones.) Wednesday the group — which is peeved at the consideration they are being offered relative to the consideration being offered to the equity holders — issued a statement reinforcing their position.

“It is a fundamental principle of Canadian law that equity holders of an insolvent company should not be compensated on account of their equity until after debt has been paid in full. An arrangement that provides for any payments to equity violates this fundamental principle,” they said.

Debenture holders are being offered $140 per $1000 face value for a total payment of $11.9 million. Equity holders are set to receive $0.06 a share for a total payment of $22.4 million. Twin Butte said the split between debt and equity was made by the buyer, presumably with some assistance from its financial adviser Deloitte.

And the group has little time for the late-in-the-day fairness opinion provided by Canaccord Genuity. That firm was called in to opine on whether the transaction was fair to debenture holders. Earlier Peters & Co. said the transaction was fair to the equity holders. “It's clear that from the outset Twin Butte has had no regard for the interests of debenture holders,” said the statement.

So despite the continued strong opposition from the debenture holders — opposition that led to Twin Butte obtaining a fairness opinion for the debenture holders, a move that delayed the special meeting — and despite the company warning that no alternative transaction has emerged, nothing has changed.

The debenture holders have proposed at least one alternative — treat all security holders equally. Under that approach debenture holders would convert their stakes to equity and receive $0.06 a share with the balance being left to the equity holders.

That alternative, which would mean a larger payment to the debenture holders and a smaller payment to the equity holders, has been communicated to the buyer and to Twin Butte's special committee, but has been rejected in favour of the original deal.

The debenture holders have a theory. “We believe the arrangement has been structured to protect insiders on the board and in management who hold substantial equity claims.”

The circular indicates the executive officers and directors have agreed to vote their 3.9 per cent equity stake and their 0.08 per cent debenture stake in favor of the transaction.

Calls to Twin Butte seeking a comment weren't returned.