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Tony Hayward’s return(s)

30 November 2011 By Quentin Webb

Nat Rothschild’s second acquisition vehicle is already creating winners and losers. Institutional investors in Vallares are nursing paper losses following its maiden acquisition. But share rewards for Rothschild and his fellow founders will yield paper gains even if the enlarged company, now renamed Genel Energy, falls further.

Rothschild founded Vallares with former BP boss Tony Hayward, former Goldman Sachs banker Julian Metherell, and investor Tom Daniel. The quartet invested 98 million pounds in the firm’s 1.3 billion pound ($2.1 billion) June float. Alongside ordinary shares, the four bought cheap “B” and “C” shares designed to reward them for finding a deal and for a rising share price.

At flotation, the founders’ stake was nearly 3.1 percent. An all-share merger with Iraqi Kurdistan’s biggest oil producer, Genel Energy International, means their B shares can turn into stock currently worth about 157 million pounds, taking their stake above 9.5 percent by end-May.

The C shares pay out 15 percent of gains from the float price, but the rights over them can only be exercised if the stock has risen at least 25 percent. Suppose they are issued when Genel stock breaches 12.50 pounds. The founders would then hold 11.3 percent.

Calculator: Genel Energy: the potential returns

This is a paper bonanza. Rothschild would make 250 million pounds, or a 282 percent return; the other founders would make 59 million pounds, or a stunning 616 percent on their smaller investments, made partly with borrowed money. By contrast, institutions who invested in the float would be up 25 percent. The insiders gain even on the downside: even if the shares halve from their 10-pound float price, the B shares (awarded just for doing a transaction) would still leave Rothschild up 26 percent.

To be sure, any investor who read the prospectus should know what they signed up for. The co-founders’ giant returns are off small bases. And the quartet would argue they risked their own capital, and are simply getting private equity-style rewards for bringing investors an unusual, and potentially extremely lucrative, deal.

Still, Genel’s future hinges on Kurdistan and Baghdad settling a long, bitter fight about oil money. And if Iraq’s squabbling politicians want examples of how to distribute wealth equitably, Genel is no place to start.


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