UPDATE 2-Reach Energy whets investor appetite for Malaysian SPACs

Thu Aug 14, 2014 11:51pm EDT

(Adds details on new regulations for Malaysian SPACs, historical performance of peers)

KUALA LUMPUR Aug 15 (Reuters) - Reach Energy Bhd IPO-RESE.KL, set up by veterans in Malaysia's oil and gas industry, made its market debut in Kuala Lumpur on Friday after completing the country's largest-ever initial public offering by a special purpose acquisition company (SPAC).

The 750 million ringgit ($236.44 million) IPO exceeded the initial share sales by other local SPACs such as Sona Petroleum Bhd and Cliq Energy Bhd, which raised between $100 million and $150 million last year.

Reach Energy, which has no existing assets, is looking to acquire firms in both the exploration and production segments of Asia's oil and gas sector, following in the footsteps of Hibiscus Petroleum, Sona Petroleum and Cliq Energy.

SPACs, common in the West but still rare in Asia, attract investors who hope a team of experienced industry executives can translate seed money into profits down the road. They are also drawn to bonus giveaways such as warrants attached to shares bought during IPOs.

But there are risks unique to SPACs.

In the United States, half of the SPACs launched in the past decade have failed to complete an actual acquisition and posted negative annual returns, according to data from research firm SPAC Analytics.

Malaysia late last year tightened rules on SPACs to assure investors their money will be secure in the months or years that such shell companies might take to find an income-generating asset.

People in the industry say only the best of SPACs have made it to the market in Malaysia, owing to the strict rules set on them. Regulators have rejected a number of applications, for firms ranging from palm oil to healthcare, as their management teams lack a track record and the ability to generate returns for shareholders, a source told Reuters.

Malaysia's Securities Commission said in December that SPAC funds from an IPO must not be used to pay remuneration for the management team until an asset acquisition is completed. The company's management also cannot sell their shares in the SPAC until assets are generating income.

The firm's management, whose experience and track record must fall in line with the SPAC's objectives, must hold at least a 10 percent stake to ensure a "meaningful financial participation".

Reach Energy is led by Managing Director and Chief Executive Officer Shahul Hamid, who has had senior roles at Esso, Shell and Petroleum Development Oman (PDO). Other top officials include former staff from Petronas, Schlumberger and Sime Darby.

According to Reach Energy's IPO prospectus, Malaysia's pilgrimage fund Lembaga Tabung Haji, CIMB-Principal Asset Management Bhd, and Hong Leong Asset Management are among the cornerstone investors in the sharia-compliant company.

"This is seen as the safest SPAC to date, because it is the first one to genuinely attract institutional attention here," said a banker who was involved in the Reach Energy IPO.

Shares of Reach Energy fell 6.7 percent to 70 sen as of 0330 GMT, down from its offer price of 75 sen per share. The stock dropped as much as 8 percent to 69 sen.

SPACS IN MALAYSIA

Hibiscus Petroleum - the first SPAC in Malaysia and Southeast Asia - bought a 35 percent stake in Norway's Lime Petroleum over two years ago.

The purchase has earned Hibiscus Petroleum a positive cash flow, after the company spent nearly two years in the red. But it will need more acquisitions to go beyond the 9 million ringgit to 12.6 million ringgit it has seen in net income in recent quarters, according to industry observers.

The company, whose top officials have worked with global industry giants such as Chevron, Murphy Oil, Schlumberger and ExxonMobil, aims to build an asset portfolio strong enough to support dividend payments while funding newer ventures that are still in a risky phase.

Sona Petroleum made its first acquisition with a 40 percent stake in oil and gas blocks from London-listed Salamander Energy Plc for $280 million.

It targets exploration and production assets in Asia, the Middle East and Africa, according to the company's website. Meanwhile, Cliq Energy has short-listed two potential acquisitions and is currently awaiting regulatory approval.

Shares of Hibiscus Petroleum have gained 65 percent since the company's IPO, while Cliq Energy has risen 10 percent and Sona Petroleum 25.6 percent since their respective entries. (1 US dollar = 3.1720 Malaysian ringgit) (Reporting by Al-Zaquan Amer Hamzah and Yantoultra Ngui; Editing by Ryan Woo)