Gulf bid for Clyde escapes MMC referral

Gulf Canada's pounds 432m bid for Clyde Petroleum was given the go-ahead by the Department of Trade and Industry yesterday, which said it had no plans to refer the offer to the Monopolies and Mergers Commission. The decision increases the pressure on Clyde to convince investors that the 105p-a-share offer represents a dramatic undervaluation of the oil producer's potential.

With two weeks to go before day 39 of the bid, the last date on which Clyde can offer new information to shareholders, attention is expected to focus on the two sides' preferred valuation methods, with one broker saying a take-out price of up to 150p a share is a possibility. Yesterday's close of 119p suggests the market expects an improved offer from Gulf or a third-party approach.

The defence being put together by Malcolm Gourlay and Roy Franklin, chairman and chief executive respectively of Clyde, is expected to focus on Gulf Canada's use of net asset value as a base for calculating the premium its bid represents. Clyde will claim that, thanks to its steady, sustainable production, it is better valued on a multiple of its current cash flow, the preferred method in the US where there are more companies with Clyde's relatively low-risk, predictable production profiles.

The net asset approach favoured by Gulf has been the traditional way of valuing UK oil explorers because in the early days of the opening up of the North Sea companies often had no production and cash flow to measure. Their assets could only be measured by attributing an asset value to future, expected production.

Clyde will claim over the next two weeks that such an approach gives no credit for the skill of its management in prolonging production by buying in and discovering new oil reserves. In its first defence document recently, the company surprised analysts with a higher-than-expected estimate of reserves, put at 130 million barrels of commercially realisable reserves and 225 million of commercial and probable reserves. Those figures had shown a sharp rise despite record production levels.

As well as arguing for a higher multiple of cash flow, Clyde is expected to bring out a hastily compiled set of results for the year to 31 December.

Gulf, which last week reported acceptances of just 0.02 per cent of Clyde's shares and extended its bid until 24 January, has a week after Clyde's final defence to announce a final offer.

Any rival bid is not expected to emerge until after that date.

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