CALGARY, ALBERTA -- (Marketwire) -- 03/04/13 -- JEC Capital Partners, LLC issues the following open letter to shareholders of Ithaca Energy Inc.:
March 4, 2013
Dear Ithaca Energy Inc. shareholders,
We, JEC Capital Partners ("JEC") write to you as a concerned shareholder of Ithaca Energy Inc. ("Ithaca" or the "Company").
On March 1, 2013 Ithaca and Valiant Petroleum plc ("Valiant"), a company listed on AIM, issued a joint press release (the "Press Release") announcing a transaction that is egregiously structured to circumvent the requirement for disinterested shareholder approval, highly dilutive to Ithaca shareholders, supported by conflicted shareholders, and timed to entrench management and the board of directors of Ithaca (the "Ithaca Board") without receiving shareholder approval (the "Opposed Transaction"). A copy of the Press Release announcing the Opposed Transaction is publicly disclosed on the Company's profile on SEDAR at www.sedar.com ("SEDAR").
For the reasons outlined below, we are petitioning the Ithaca Board to consider the views of all of its shareholders by seeking disinterested shareholder approval for the Opposed Transaction. The summary reasons are as follows:
- Dilution of Ithaca Shareholders. The Opposed Transaction is extremely dilutive to Ithaca's shareholders, contemplating a share issuance equal to approximately 22% of Ithaca's currently outstanding share capital (just shy of the 25% threshold required for a shareholder vote by the Toronto Stock Exchange) with the remainder of the purchase price backstopped by an expensive US$350 million bridge loan. This acquisition structure is clearly a deliberate attempt by Ithaca to avoid a shareholder vote on the Opposed Transaction through the use of expensive debt to satisfy the balance of the purchase price. Furthermore, Ithaca's stock is currently tremendously undervalued and we therefore question the judgement and motivation of the Ithaca Board to issue stock at this valuation.
- Cross-Ownership Benefits Conflicted Ithaca Shareholders. Management of Ithaca have entered into understandings or agreements with shareholders of Ithaca who are also significant shareholders of Valiant. These conflicted shareholders will be given the opportunity to vote on the Opposed Transaction only by virtue of their ownership of Valiant shares. You, like JEC, as a disinterested shareholder of Ithaca will not be given the opportunity to vote on a significant transaction affecting your investment whereas conflicted shareholders of Ithaca will be permitted to do so. Moreover, these conflicted shareholders (whose significant interest in Valiant will, on closing of the Opposed Transaction, result in a 37% gain in the value of their Valiant shareholdings relative to the trading price prior to the announcement of the Opposed Transaction) will have their shareholdings in Ithaca (on a post-transaction basis) concentrated as a result of the Opposed Transaction by the acquisition of additional Ithaca shares. The Opposed Transaction will therefore materially affect the control of Ithaca.
- Avoiding Ithaca Shareholders. The Opposed Transaction has been announced in the midst of a proxy battle highlighting Ithaca's attempts at entrenchment. Following the close of markets on March 1, 2012, Ithaca filed on SEDAR a notice of meeting and record date for a special meeting to be held on April 8, 2013 (the last possible date requested in the Requisition (as defined below)). By contrast, the meeting of Valiant shareholders to determine the Opposed Transaction (which contemplates the addition of two Valiant directors to the Ithaca Board) will take place on April 2, 2013. Ithaca is engaging in entrenchment tactics by filling the Ithaca Board with two additional directors, and is forcing the Opposed Transaction on Ithaca shareholders prior to the requisitioned meeting in order to avoid accountability.
Following the announcement of the Opposed Transaction, Ithaca shares trading on AIM closed down nearly 10% on significant selling volume. Ithaca shares closed down nearly 7% on the TSX following the transaction's announcement, shedding nearly $34 million in shareholder value in a single day.
The Ithaca Board has not created any shareholder value in over three years. We have significant, and now validated, concerns about the Ithaca Board's judgement, motivation, and competency. It should also be noted that the Ithaca Board owns, in aggregate, less than 0.73% of Ithaca and therefore has little at stake.
Dilution of Ithaca Shareholders
As disclosed in the Press Release, Ithaca will pay the approximate C$318 million purchase price (representing a premium of approximately 37% to the Valiant closing share price on February 28, 2013) by issuing shares to Valiant shareholders equal to approximately 22% of Ithaca's currently outstanding share capital. This is just shy of the 25% threshold requiring a shareholder vote as set by the TSX. JEC believes that this acquisition structure was intentionally designed to avoid a shareholder vote, with management of Ithaca resorting to expensive debt to make up the balance of the purchase price.
Disclosure regarding the cash compensation and the terms of the credit to be provided to Ithaca to finance the Opposed Transaction are buried in a schedule to the Press Release (at page 19), which discloses that the cash portion of the acquisition consideration will amount to approximately $200 million which will be funded in part by a new US$350 million 12-month bridge facility. The balance of the $150 million bridge facility will be used by Ithaca to satisfy approximately $150 million in existing Valiant debt.
On January 10, 2013, Ithaca publicly announced its 2013 Outlook. Prior to the Opposed Transaction, Ithaca had anticipated net capital expenditures in 2013 of US$360 million and net cash flow from operations of approximately US$125 million. Based on Ithaca's announced 2013 operating plan, it would begin 2013 with no debt and end 2013 with approximately US$235 million in debt. Taking into account debt related to the Opposed Transaction (US$350 million), potential incremental cash flow from the Opposed Transaction ($US275 million), and Valiant committed capital expenditures ($200 million), Ithaca now stands to end 2013 with over US$500 million in debt, leaving the Company highly leveraged and exposing shareholders to significant risk. Again, the Opposed Transaction was intentionally designed to avoid a shareholder vote and the result is a Company with a dangerously levered balance sheet.
Quite simply, the Opposed Transaction is extremely dilutive to Ithaca shareholders. In addition, when considering the size of the Opposed Transaction relative to the liquidity of Ithaca, the Opposed Transaction is also extremely expensive. These factors alone lead to the necessary conclusion that Ithaca's disinterested shareholders deserve an opportunity to vote on the Opposed Transaction.
Cross-Ownership Benefits Conflicted Ithaca Shareholders
The Opposed Transaction gives an unfair advantage to insiders and select joint shareholders of Ithaca and Valiant relative to non-insiders and arm's length shareholders.
On page 2 of the Press Release, Ithaca names a number of shareholders that have given letters of support to Ithaca in respect of the Opposed Transaction. Additionally, disclosure is made in the Press Release that Ithaca has received irrevocable undertakings and non-binding letters of support to the Opposed Transaction from a few large shareholders of Valiant, representing approximately 41% of the outstanding Valiant shares. JEC was able to determine, based on public disclosure and market research tools used in the industry, that the following named Ithaca shareholders who have given their support to Ithaca are also significant shareholders of Valiant:
Percentage Percentage Ownership OwnershipShareholder of Ithaca of Valiant(1) (1)(2)(3) (1)(2)(3)--------------------------------------------------------------------------------------------------------------------------------------------------------Artemis Investment Management Ltd 0.97% 5.14%GLG Partners LP 3.29% 9.83%HSBC Investment Funds (UK) Ltd. 1.45% 0.12%JP Morgan Asset Management UK 0.11% 6.69%% Total 5.82% 21.78%-----(1) Identities of shareholders and shares owned sourced from Bloomberg and Press Release.(2) Percentage ownership calculated based on total Ithaca shares outstanding of 259,953,336 (as disclosed in the Press Release per AIM requirements) and 40,945,225 for Valiant (as disclosed in the Press Release).(3) Bloomberg lists multiple entities for both HSBC and JP Morgan; table above reflects only entities with "UK" listed in the entity name.
In light of this information, it is clear that at least four shareholders of Ithaca who are also significant shareholders of Valiant (representing nearly 22% of Valiant's outstanding share capital) will have the opportunity to vote on the Opposed Transaction (by virtue of their ownership of Valiant shares) at the Valiant shareholder meeting. This constitutes an unfair opportunity to shareholders, like you and JEC, for which the Ithaca board has provided no explanation.
The above shareholders (and any other undisclosed joint Ithaca and Valiant shareholders) are conflicted because, as at the date of the announcement of the Opposed Transaction, such conflicted shareholders gained 31.46% to the value of their Valiant shares trading on AIM, representing a per share gain on Valiant shares at the close of markets on March 1, 2013 of GBP 1.09 (C$1.68, based on the Bank of Canada closing exchange rate on the same date). Conversely, such conflicted shareholders sustained an approximate 6.6% loss to the value of their Ithaca shares, representing a per share loss on Ithaca shares of $0.13. The result is that, for every shareholder holding one Valiant share and one Ithaca share, the net gain realized by conflicted shareholders, as at the close of markets on March 1, 2013 was approximately C$1.55 (the "Conflict Spread"). The Conflict Spread may be even greater on closing of the Opposed Transaction, considering that the consideration per Valiant share represents a premium of approximately 37% to Valiant's closing price on the last trading day prior to the announcement of the Opposed Transaction, or where a conflicted shareholder owns a greater number of Valiant shares than Ithaca shares.
As a further result of the unfair treatment of disinterested Ithaca shareholders created by the Conflict Spread, conflicted shareholders of Ithaca and Valiant will stand to become even more concentrated within the Ithaca capital structure following the Opposed Transaction, as their Valiant shareholdings will be acquired in consideration for additional Ithaca shares (as well as funds borrowed by Ithaca, of which they are shareholders, the full economic risk of which is borne by the disinterested Ithaca shareholders who receive nothing and are diluted). The issuance of additional Ithaca shares to joint shareholders of both Ithaca and Valiant will increase the proportionate shareholdings of such shareholders in Ithaca, with the result that the Opposed Transaction will materially affect control of Ithaca.
It is for these reasons that we are demanding the Ithaca Board to obtain a disinterested shareholder vote. We understand why shareholders of Ithaca, who are also shareholders of Valiant and friends of management, are supportive of the Opposed Transaction: they get a vote on the Valiant side of the Opposed Transaction, enjoy a premium from their Valiant holdings and will achieve a greater percentage ownership of Ithaca with the result that the Ithaca Board and management will become entrenched. Disinterested shareholder approval is clearly required in these circumstances.
Avoiding Ithaca Shareholders
On February 14, 2013, JEC and certain other shareholders holding more than 5% of the Company's issued and outstanding shares, requisitioned a meeting of Ithaca's shareholders for the purposes of voting on the addition of two new directors to the board, both of whom had been nominated by JEC (the "Requisition"). The Requisition was filed in response to serious concerns respecting the strategic direction of Ithaca under the leadership of the Ithaca Board and requested a meeting date of no later than April 8, 2013. A copy of the press release is available on SEDAR.
Later the same day that the Opposed Transaction was announced, Ithaca filed on SEDAR its notice of meeting and record date which set a meeting date of April 8, 2013 for a special meeting of shareholders (a copy of which is available on SEDAR), being the last possible date requested by JEC. The meeting at which the Opposed Transaction will be determined by shareholders of Valiant (and the conflicted shareholders of Ithaca) is set to occur on April 2, 2013.
While the Valiant discussions may have been ongoing before the Requisition, it is plain to see the entrenchment games being played by the Ithaca Board and management team. Not only was the Opposed Transaction structured to circumvent regulatory rules for a disinterested shareholder vote, but the Ithaca Board and management team thought it appropriate to call a special meeting of shareholders on the last possible day requested in the Requisition, being April 8, 2013, which is six days after the Valiant shareholder meeting to approve the Opposed Transaction and which also contemplates the addition of two Valiant board members to the Ithaca Board.
Ithaca has structured the Opposed Transaction specifically to avoid a shareholder vote, to thwart the Requisition as well as to flout the will of its shareholders and the rules of the regulators. Not only is this alarming in its own right, but Ithaca's timing in announcing and setting a special meeting date in respect of the Requisition following the date on which the Opposed Transaction will be voted on by Valiant shareholders, is simply egregious.
Ithaca is not seeking shareholder approval for the Opposed Transaction as it has stated in the Press Release that shareholder approval is not required.
We implore the Ithaca Board to reconsider its position and obtain disinterested shareholder approval for the Opposed Transaction.
If you share our views, we encourage you, as a disinterested shareholder of Ithaca, to voice your distaste for the actions of the Ithaca Board and similarly demand that the Opposed Transaction be put to a disinterested shareholder vote.
We have shared our views on the Opposed Transaction and the subversive conduct of the Ithaca Board with the Toronto Stock Exchange, the London Stock Exchange and the Alberta Securities Commission and will be taking such further steps in those and other forums as are appropriate to protect the interests of JEC as a shareholder of Ithaca. It is incumbent on shareholders of Ithaca to make it known to the Ithaca Board that we will not accept such reckless disregard for our reasoned concerns and to publicly oppose the Opposed Transaction until the Ithaca Board gives us the disinterested shareholder vote we deserve. We look forward to receiving your support on these matters.
Yours very truly,
JEC Capital Partners
Information in Support of Public Broadcast Solicitation
JEC is relying on the exemption under section 9.2(4) of National Instrument 51-102 - Continuous Disclosure Obligations to make this public broadcast solicitation. The following information is provided in accordance with corporate and securities laws applicable to public broadcast solicitations. This solicitation is being made by JEC, and not by or on behalf of the management of Ithaca.
The address of Ithaca is Suite 1600, 333-7th Avenue S.W., Calgary, Alberta, Canada.
The information required by Form 51-102F5 - Information Circular is disclosed in this press release, a copy of which is also available on Ithaca's company profile on SEDAR at www.sedar.com.
Proxies for the Ithaca shareholders' meeting may be solicited by mail, telephone, email or other electronic means as well as by newspaper or other media advertising, and in person by managers, directors, officers and employees of JEC, who will not be specifically remunerated therefor. In addition, JEC may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian corporate and securities laws, conveyed by way of public broadcast, including through press releases, speeches or publications, and by any other manner permitted under applicable Canadian laws. JEC may engage the services of one or more agents and authorize other persons to assist it in soliciting proxies on behalf of JEC. All costs incurred for the solicitation will be borne by JEC.
JEC is not requesting that Ithaca shareholders submit a proxy at this time. Once JEC has commenced a formal solicitation of proxies, a registered holder of common shares of Ithaca that gives a proxy may revoke it: (a) by completing and signing a valid proxy bearing a later date and returning it in accordance with the instructions contained in the form of proxy to be provided by JEC, or as otherwise provided in the final proxy circular, once made available to shareholders; (b) by depositing an instrument in writing executed by the shareholder or by the shareholder's attorney authorized in writing, as the case may be: (i) at the registered office of Ithaca at any time up to and including the last business day preceding the day the meeting of Ithaca shareholders or any adjournment or postponement of the meeting is to be held, or (ii) with the chairman of the meeting prior to its commencement on the day of the meeting or any adjournment or postponement of the meeting; or (c) in any other manner permitted by law. A non-registered holder of common shares of Ithaca will be entitled to revoke a form of proxy or voting instruction form given to an intermediary at any time by written notice to the intermediary in accordance with the instructions given to the non-registered holder by its intermediary.
To the knowledge of JEC, neither JEC nor any of its managers, directors or officers, or any associates or affiliates of the foregoing, nor any of the JEC director nominees, or their respective associates or affiliates, has: (i) any material interest, direct or indirect, in any transaction since the beginning of Ithaca's most recently completed financial year or in any proposed transaction that has materially affected or would materially affect Ithaca or any of its subsidiaries; or (ii) any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter currently known to be acted upon at the meeting of Ithaca shareholders other than the election of directors.
JEC Capital Partners