UPDATE 5-Shell drops Cove bid, rethinks East Africa gas plan

Mon Jul 16, 2012 3:10pm EDT

* PTT can now complete 240 pence a share deal

* Shell did not want to overpay-source

* Move makes Shell/Anadarko tie-up look likely

By Sarah Young and Sophie Sassard

LONDON, July 16 (Reuters) - Royal Dutch/Shell abandoned its bid for Cove Energy Plc on Monday, leaving smaller Thai rival PTT to complete a $1.9 billion takeover and fuelling talk it has found a new way to access east Africa's gas discovery boom.

The move will have cost hedge funds dear. An auction process had been due to start this week, and Cove stock had been bid well above PTT's offer price of 240 pence a share in anticipation that Shell would raise its 220 pence offer.

Cove shares, which closed at 275.5 pence last week, dropped 13.6 percent to finish just shy of PTT's offer at 238.5 pence after the news.

"Shell Bidco has today decided not to revise its offer of 220 pence in cash for each share of Cove, and not take part in the auction procedure for Cove," Shell said in a statement.

Analysts say Europe's largest oil and gas group has other opportunities to secure the access to the gas finds off Mozambique and Tanzania that were the reason for the takeover attempt.

Shell gave no reason for withdrawing, but a source familiar with the bid process said it did not want to overpay and was confident it could get into east Africa gas action by other routes.

ANADARKO CONNECTION

Cove owns an 8.5 percent stake in a Mozambique licence in the Rovuma offshore basin containing gas discoveries that could be a major provider of Liquefied Natural Gas (LNG) to Asia in future.

Shell has much at stake in LNG market, hence its strong desire to get involved in potential new supplies. U.S. explorer Anadarko has a 36.5 percent stake in the licence, but little experience of LNG. A tie-up of some sort has long been mooted by analysts.

"I would be very surprised if they hadn't talked to everybody here," said the source, who spoke on condition of anonymity. "LNG is the hot stuff right now and Shell's investment committees are very aware of it. Something could well happen by the end of the year."

Other points of entry to East Africa for Shell could include tie-ups with Italy's ENI, which has also found gas in Mozambique, or BG Group and Exxon Mobil, which have discoveries off the coast of Tanzania.

The rival bidders had been heading into the first formal takeover auction for a listed British company since 2008 after a five-month bidding war.

Britain's takeover watchdog ruled on Friday that if neither suitor had declared its current offer final before 1600 GMT on Monday, an auction would start the next day. That could have involved bids submitted to daily deadlines until a winner was found.

The two companies have been battling to buy Cove since February.

It was not just the hedge funds who did not see Shell's withdrawal coming.

"I was very surprised to see Shell walk," said an investment banker who was not involved in the deal. ... I think that Shell didn't want to take the risk of increasing their offer and getting trumped by PTT again. They didn't want to end up as the losers. They must have a plan B around Anadarko or one of the partners."

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