Heritage Oil has entered into a non-binding Memorandum of Understanding ("MoU") with Genel Enerji A.Ş. The MoU is subject to various conditions and execution of binding documentation to acquire Genel Energy International Limited ("Genel"), a private independent oil and gas exploration and production ("E&P") company, which holds licences in the Kurdistan Region of Iraq ("Kurdistan"). The proposed acquisition (the "Proposed Acquisition") would be paid for wholly in new shares of Heritage and would result in Genel shareholders owning approximately 50% of the enlarged ordinary share capital of Heritage. It is anticipated that following the Proposed Acquisition, the Company, as enlarged by the acquisition of Genel ("the Enlarged Group") will be re-named HeritaGE Oil plc
Heritage's management believe that the Proposed Acquisition will offer considerable shareholder value as it will create a prominent Main Market London listed production company which should have the financial capacity to bring into production its enlarged development and exploration portfolio, create the infrastructure for the development of the Taq Taq and Miran assets in Kurdistan, while also generating significant cash flow following the commencement of oil exports on June 1, 2009.
Summary of Transaction
The MoU is not legally binding in respect of its principal terms and therefore execution of binding documentation in relation to the Proposed Acquisition is subject to, among other things: (i) the respective parties conducting detailed due diligence; and (ii) the parties reaching agreement on definitive and legally binding documentation including an implementation agreement. Subject to satisfactory completion of these conditions and the ones referred to in the MoU, Heritage is targeting the third quarter of 2009 for the execution of definitive documentation. Once the legally binding documentation has been executed, completion of the Proposed Acquisition will be conditional on among other things: (i) the approval of Heritage's shareholders voting at an extraordinary general meeting to be called at the appropriate time; and (ii) admission of the ordinary shares of Heritage, as enlarged by the issue of shares in relation to the Proposed Acquisition, to the Official List of the UK Listing Authority and to trading on the London Stock Exchange. Accordingly, there can be no assurances that the Proposed Acquisition will complete or that it will complete on the terms outlined in the MoU or herein.
Should the Proposed Acquisition proceed, it will be treated as a reverse takeover under the Listing Rules of the UK Listing Authority (the "Listing Rules"). On June 3, 2009, at Heritage's request following a significant movement in its share price, Heritage's shares were suspended from trading on the London Stock Exchange and Heritage announced that it was in preliminary discussions with a third party regarding a possible merger. This announcement provides information in relation to this possible merger, together with details of where certain publicly available information on the licences in which Genel has interests can be obtained. Accordingly, the UK Listing Authority has confirmed that the suspension in the trading of Heritage's shares will be lifted following the release of this announcement.
The Enlarged Group would be an Anglo-Turkish oil company with a unique footprint in Kurdistan, producing oil for export and for the local markets, together with an exciting prospect in the Albert Basin in Uganda. The Enlarged Group should benefit from the additional expertise of Genel, with its proven track record of turning exploration into production in Kurdistan. Together with the Ugandan assets and other assets in Africa, the Middle East and Russia, the Enlarged Group would create a leading London listed international E&P company. The financial flexibility of the Enlarged Group should also facilitate the fast track development of oil production in Kurdistan and Uganda.
It was recently announced that Genel was the nominated party by the Kurdistan Regional Government ("KRG") to acquire third party back-in rights to a number of licences in Kurdistan including the Tawke and Miran licenses and there exists an associated long-term community and corporate social responsibility support liability of approximately US $1.1 billion to fund local infrastructure projects within Kurdistan which is to be funded gradually from Genel's future profits. In the event of a change of control of Genel, approximately US $605 million of such liability will become the direct responsibility of Genel's vendors to be settled on terms acceptable to the KRG. The remaining US $495 million will remain a long-term liability of Genel's acquirer and will be payable to the KRG each quarter on an asset by asset basis from a percentage of the future oil profit share of Genel. As part of the due diligence, and in consultation with the KRG, an understanding of this liability is a key part of determining the relative valuation of Genel.
As the Proposed Acquisition, if completed, will be classified as a reverse takeover of Heritage under the Listing Rules, applications will be made in due course to the UK Listing Authority and the London Stock Exchange for the Enlarged Group's ordinary shares to be admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange respectively. The eligibility of the Enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority.
Information on Genel
Genel is a private, independent E&P company. Genel is 56% owned by the Çukurova Holding Group, which itself is one of the largest industrial and commercial conglomerates in Turkey, and which has a number of investments across the automotive, telecommunications, media, textile, energy and information technology sectors.
Genel has been operating in Kurdistan since 2002, following the establishment of Kurdistan as an autonomous region of Iraq. Genel's interests are set out in the table below. Genel also has a 100% interest in a development project for an oil refinery near the Taq Taq and Miran fields.
Commenting on today's announcement, Dr. Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional Government said,
Tony Buckingham, Chief Executive Officer of Heritage, commented, "The potential combination of our two companies brings together a long held ambition to develop the assets in our core areas. We believe that shareholders will support the transaction which is anticipated to create significant shareholder value by bringing these fields to production in a timely manner and generating cash flow to explore and develop our multi-billion barrel resource potential both in Northern Iraq and Uganda. Heritage also recognises the strategic benefits of working with a partner such as Genel with a track record of turning exploration into production in the region and the positioning it will provide with respect to the rest of Iraq and the Middle East."
Mehmet Sepil, Chief Executive Officer of Genel, commented, "We are excited about the possibility of combining with Heritage to create a significant Main Board listed company with a strong financial capability and access to international capital markets, international expertise and with the aim of expanding the activities of the Enlarged Group in other countries in the Middle East. We intend to bring our world-class Taq Taq and Tawke assets into production immediately and the Miran asset subsequently. Production will be for both exports to the world market and also to serve the local market, generating significant cash flows for the benefit of all shareholders. The combination of Heritage with its worldwide experience and Genel's Turkish nationality together with its significant long experience and track record in the Kurdistan Region would help to develop our assets in an efficient and timely manner and would deliver excellent value to all stakeholders including the people of Iraq."
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