15 May 2018

Examining the Purchase of AWE

The Pengana Absolute Return Asia Pacific Fund (the ‘Fund’) is one of two funds focused on generating absolute returns at Pengana. The Fund’s investment philosophy is to seek consistent superior investment returns for investors, rather than returns driven by the general direction of equity markets. This means that the investment performance of the Fund is not correlated with equity markets, and makes the Fund a great overall portfolio diversifier. The Fund hedges broader market risks with very low beta exposure. It does this by investing in and monitoring companies that are undergoing corporate events within the Asia Pacific region. The strategies that the Fund employs, in order to participate in these events, can be categorised as:

  • Mergers and Acquisitions (M&A)
  • Relative Value
  • Directional Alpha

Through detailed analysis and consistent monitoring and research, the team are able to identify and analyse potential market opportunities across the Asia Pacific region.

An example of this strategy at play can be seen in the mergers and acquisitions space with the recent completed purchase of Australian oil and gas company AWE Limited, by Japanese company Mitsui & Co. for $602 million. When deciding whether to invest, the Absolute Return Asia Pacific Fund team examines a number of key indicators, such as:

  • Probability of a counter proposal by another party.
  • The rational of the acquisition by bidder acquiring the company.
  • Evidence of an optionality, where the first price being discussed is not the last one.
  • The company’s strategic assets.
  • Whether, irrespective of markets being strong or soft, the rate of return will be captured in the transaction.
  • How the deal will fit with the Fund’s existing portfolio.

In the example of AWE, there were three bidders, two who initially underbid the market valuation before Mitsui & Co.’s opening bid of $0.95 cents-a-share fell within the expected range. The presence of two initial bidders indicated deal tension and therefore upside optionality, a conviction that was later proved true when third bidder Mitsui & Co. placed their winning bid. It should be noted however, that despite the strong initial attraction of a deal, the team always completes further research and screening to ensure all information is valid and there is a probabilistic understanding of how the acquisition might play out.

This research includes:

  • Speaking to management and advisers to the transaction.
  • Reading and interpreting media releases and company communications.
  • Keeping track of company mentions in media and speculation.
  • Examining the strategic position of the bidder to determine who will benefit from this deal the most.
  • Quantify upside and downside risk.
  • Quantify fundamental value and strategic assets.

In the case of AWE, the team’s analysis indicated the acquisition would probably continue successfully, and was proven correct when the Mitsui & Co. bid of $0.95 cents per share caused AWE’s shares to re-rate +16.5% before the completion of the deal. Contributing in excess of 40 base points to the overall performance, this demonstrates an alternate source of alpha opportunities that are available to investors in this Fund.

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