Time is running out for Afren (LSE: AFR). The company’s future now hinges on a deal with Seplat but so far, no deal has been forthcoming and with every day that passes, the group gets closer to the edge.
Taking too long
Afren’s only hope is to hammer out a takeover deal with Nigeria’s Seplat Petroleum. Indeed, City analysts believe that if Afren fails to negotiate a deal, it will fail pretty quickly. Specifically, analysts believe that with oil prices at present levels, Afren’s operations will only generate enough cash to cover its debt interest payments over the next 12 months.
This forecast assumes that Afren reduces capital spending to zero: an unrealistic assumption. The company will still have to carry out maintenance on its existing oil fields.
Unfortunately, it seems as if a deal between Afren and Seplat is unlikely to go ahead. The two parties have been in talks for nearly two months now and so far no deal has been announced.
It’s possible that Seplat wants to carry out rigorous due diligence on Afren, which would explain the delay but it’s more likely that the two groups are fighting over an appropriate purchase price. After all, Seplat will have to take on Afren’s liabilities if it acquires the company, including Afren’s $1.2bn debt pile. This means Seplat will have to seek approval from Afren’s bondholders.
Nevertheless, a resolution to whatever issue is causing the delay will have to be found soon. The deadline for Seplat to make an official bid is 5pm on 13 February, which gives the company only two days.
Worst-case scenario
Bondholders are not known for their flexibility, and if a deal hinges on bondholders demands then it’s likely that shareholders will be wiped out. Lenders have already been extremely lenient towards Afren, and it’s unlikely that they will continue to be so forgiving.
For example, lenders of the $300m Ebok debt facility agreed to a deferral of the $50m amortisation payment due on 31 January until 27 February. A 30-day grace period under the 2016 bonds has also been utilised with respect to $15m of interest that had been due on 1 February.
But this means at the end of February, Afren, if it is still independent, will have to find $65m to fund interest costs or admit defeat. Raising funds via a rights issue remains an option, although this would have to be a last ditch attempt.
