Chaarat Gold (LON: CGH) has secured what looks like a very interesting investment agreement. Possibly even a slightly odd investment agreement if we're to be frank about it. It's also one that wouldn't be allowed for a British company. So there's that consideration of why it wouldn't be allowed to think through - such rules are for the protection of minority shareholders after all.
The structure of the bid is: “an indicative term sheet with Xiwang International Company Limited ("Xiwang") for a potential equity investment of US$250 million” Well, OK, that's good. But this is slightly odd: “The Investment would be in the form of a new issue of shares in Chaarat at a price of £0.20 per share resulting in Xiwang holding 60% of the shares in Chaarat.” Well, OK, that would finance the company for the next round for gold exploration and building out mines very nicely. So, what's not to like about this?
Well, Chaarat is a BVI company and so isn't bound by the Takeover Code. So too is Xiwang and so also not bound. Which is why the bid is only for 60% of the company.
Chaarat Gold share price from London Stock Exchange
Under the standard UK rules if you acquire more than 29.9% of a company then you've got to at least offer a bid for all of it. You can't buy up 60% that is and then not offer for all of it. Because it's well known that minority shareholders in a majority owned company can be - well, the temptation might be there shall we say - treated less than fairly by that majority owner. So, if a bid comes in to create a majority position then that takeout price must be offered to everyone. Which is exactly what isn't happening here.
It's also possible to raise a slight eyebrow at that price - 20 pence is above any price in the last 12 months, a near 100% premium to the price just yesterday. A very full price should we say. One that many current holders would love to get for their shares of course.
That's not going to be possible here and that's what complicates the valuation of CGH. Yes, there's new money coming in at a premium - that increases the value of the company. But it's also true that holders are going to be - even in aggregate - in a minority position in the company when the deal is completed. That might not be a position that many wish to continue to hold.
So, while the injection of funds is obviously positive it's not entirely obvious that the surrounding details are as well. We can't see anyone else trying to break up this deal so we'll all have to take it as it is. But the price could be volatile as people make up their minds about this.