[Tanzania] Orca Exploration finalizes terms for $130 million investment by Swala Oil and Gas
Orca Exploration Group Inc. has executed and delivered into escrow definitive agreements providing for an up to $130 million investment by Swala Oil & Gas Tanzania plc in the Orca Group.
Swala is an independent oil & gas exploration and production company, the first to be listed on an East African Stock Exchange and having a significant local Tanzanian ownership.
The definitive agreements for the investment transactions have been signed by the parties and delivered into escrow pending satisfaction of certain escrow release conditions, including satisfaction of the remaining conditions precedent to the completion of the investor's financing transactions, approval of the International Finance Corporation ("IFC") and the TSX Venture Exchange to the investment transactions, and satisfaction of all "Know Your Client" requirements of the registered agent of PAE PanAfrican Energy Corporation ("PAEM") by Swala and Swala (PAEM) Limited ("Swala PAEM"), a wholly-owned subsidiary of Swala.
Once these release conditions have been satisfied, which must occur by 12 January 2018, the definitive agreements would be delivered and become effective and the first investment transaction would be completed.
Pursuant to an investment agreement with Swala PAEM, Swala PAEM has agreed, subject to conditions, to acquire up to 40% of the outstanding shares of Orca's wholly owned subsidiary, PAEM, a Mauritius-registered company and the sole shareholder of PanAfrican Energy Tanzania Limited ("PAET") for a purchase price of US$130 million (subject to certain purchase price adjustments).
The investment transactions are based on an agreed value of US$325 million for PAEM (US$265 million net of the outstanding IFC loan to PAET). PAET owns and operates the Orca Group's natural gas exploration, development and supply business in Tanzania.
On satisfaction of the escrow release conditions, Orca would sell 7,933 Class A PAEM Shares (the "PAEM Shares") (7.93%) that it holds of PAEM to Swala PAEM for gross proceeds of US$25,782,250 (US$21,022,450 net of certain purchase adjustments) payable in US$17,055,950 cash and US $3,966,500 face amount of Swala convertible preferred shares.
The cash portion of the purchase price for the first investment transaction has been deposited into escrow under an escrow agreement with Orca, Swala and Swala's investors. The first investment transaction must be completed on or before 12 January 2018.
Subject to the completion of the first investment transaction, Orca would agree to sell an additional 32,067 PAEM Shares (32.07%) for gross proceeds of US$104,217,750 (US$84,977,550 net of certain purchase adjustments) payable in US$72,636,358 cash and US $12,341,192 face amount of Swala convertible preferred shares. The remaining investment transactions must be completed on or before 28 February 2018.
Closing of the second and third tranches would be subject to the satisfaction or waiver of certain conditions precedent, including Swala and Swala PAEM raising the necessary funds to complete the remaining investment transactions and approval by the boards of directors of Orca, Swala PAEM and Swala. No assurances can be given that such transactions will be completed on the terms proposed or at all.
In addition to receiving the approval of the TSX Venture Exchange, completion of the investment transactions is subject to the approval of IFC. Orca expects to enter into an amendment and consent letter with PAET and IFC pursuant to which PAET will agree to repay the IFC loan facility in part based on the proportion to the total percentage of PAEM Shares sold to Swala PAEM and, in any event, all of the outstanding principal amount by no later than December 10, 2019.
Upon each closing occurring under the Investment Agreement, IFC's 7% participation interest would be reduced pro rata with the percentage of the PAEM Shares sold to Swala in consideration for PAET paying IFC the sum equal to the liquidity participation interest (10%) of the proportion of PAEM sold based on a valuation of US$325 million; and the parties would agree to make certain amendments to the IFC loan agreement and related financing documents in connection with the foregoing.
Under the Investment Agreement, Orca would have the right to monetize the benefits of certain assets, and the obligation to bear the burden of certain liabilities of the Tanzanian business that relate to the period prior to 1 January 2017 (the "Effective Date").
Pre-effective date assets include, among other things, the right to receive payment of the arrears of Tanzania Electric Supply Company Limited and arrears owing by Songas Limited as at the Effective Date, being a total of US$125.3 million, less an estimated US$51 million in TPDC Profit Gas payable under the Production Sharing Contract for the Songo Songo field on receipt of net revenues realized from these arrears.
Pre-effective date liabilities include, among other things, any tax liabilities, liabilities resulting from litigation or other dispute resolution processes, and any environmental liabilities related to operations conducted by PAEM and its subsidiaries, which occurred or relate to any period ending on or before the Effective Date. Pre-effective date liabilities do not include any liabilities to IFC under the IFC Loan or certain related agreements.
Pre-effective date assets of US$80 million cash, US$9 million of working capital and US$4 million of Tanzania Electric Supply Company Limited arrears were distributed to Orca during 2017. Further details regarding the pre-effective date assets and liabilities retained by Orca under the Investment Agreement are available in Orca's material change report, and in the copy of the Investment Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.
Orca Chairman and Chief Executive Officer, W. David Lyons commented, “This is a transformational transaction for Orca. To the broader Orca Group, this investment is strategic in both underpinning the intrinsic value of our business and providing a platform from which to grow and diversify our company and deliver value to our shareholders.
In respect of our investment in Tanzania, Orca has for some time sought the right partner for a minority stake, and we welcome Swala’s participation, and importantly Swala’s ability to attract and engage both recognized international institutional investors as well as Tanzanian investors to the business.”
The issuance of the Swala convertible preferred shares is subject to receipt of the approval of the shareholders of Swala and approval of the Dar es Salaam Stock Exchange.
If Swala is unable to obtain such approvals within 45 days of the effective date of the Investment Agreement, then that portion of the purchase price payable in Swala convertible preferred shares must be paid in US dollars plus interest on the balance of the purchase price owing at a rate of 10% per annum from the closing date until the date of payment.
Under the Investment Agreement, Swala will use its best efforts to cause the board of directors of Swala to authorize the creation of 50 million Swala convertible preferred shares, and to obtain the approval of Swala shareholders to the creation and issuance of the Swala convertible preferred shares to Orca. The meeting of Swala shareholders to consider the creation and issuance of the Swala convertible preferred shares is expected to take place before 2018.
Further details regarding the Swala convertible preferred shares are available in Orca's material change report, and in the copy of the Investment Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.
In connection with the Investment Agreement, Orca and Swala PAEM have entered into a shareholders' agreement (the "Shareholders' Agreement") with PAEM for the operation and management of PAEM. The Shareholders' Agreement governs the material rights and obligations of both parties in relation to their ownership of PAEM, including transfers of the PAEM Shares, the election of directors of PAEM, funding arrangements and other matters.
The Shareholders' Agreement entitles each PAEM shareholder, subject to certain exceptions, to acquire the other party's PAEM Shares in the event of a change in control (the "Compulsory Transfer Right").
Under the Shareholders' Agreement, upon a change in control of either Orca or Swala (the applicable party, the "Seller"), the other party (the "Buyer") will have the option to purchase the Seller's PAEM shares. The Compulsory Transfer Right may be exercised by the Buyer by providing written notice of its intention to exercise the right within 45 days after the Buyer receives notice to the Seller, which notice must include the proposed price for the Seller's PAEM shares.
If the Seller and Buyer are unable to agree on a price for the Seller's PAEM Shares, the value will be determined by an independent expert. If the Buyer does not provide notice to the Seller of its intent to exercise the Compulsory Transfer Right, or is unable to finance the purchase of the Seller's PAEM Shares, then the Compulsory Transfer Right will expire without any transfer of the PAEM Shares.
Orca will retain the right to appoint a majority of the directors to the board of PAEM notwithstanding the completion of Swala's entire 40% investment in PAEM. Subject to certain exceptions, decisions of PAEM shall be made by a simple majority vote of the directors of PAEM.
PAEM's board of directors will be made up of five directors. Shareholders of PAEM will be entitled to nominate one or more directors to PAEM's board based on the percentage interest held by the shareholders (a "Nomination Right").
Each Nomination Right will be represented by a 20% block of interest in PAEM. The right of any PAEM shareholder to a Nomination Right will correspond to each whole or majority block of a 20% interest of PAEM held by such shareholder. Upon the completion of the first investment transaction, Swala PAEM will hold a 7.93% interest in PAEM.
Orca will retain the Nomination Rights for directors. Assuming completion of all the investment transactions, Swala will own a 40% interest in PAEM and will have two Nomination Rights, with Orca retaining three Nomination Rights.
In the event that Swala's shareholders' interest in PAEM is 5% or more, but Swala is not entitled to a Nomination Right, Swala would be entitled to nominate one person, as an observer, to receive the same information and notices as directors, and to attend board meetings, but not to vote. If at any time either party ceases to be a shareholder of PAEM or again becomes entitled to nominate a director, it shall no longer have the right to nominate an observer.
The Shareholders' Agreement also provides for certain restrictions on transfer of the PAEM Shares, rights of first refusal, drag along and tag along right and events of default. Further information regarding the Shareholders' Agreement is available in Orca's material change report, and in the copy of the Shareholders' Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.