15 Oct 2020

What does the recently announced proposed Premier/Chrysaor merger tell us?

Premier and Chrysaor have announced that they are to merge, in a Press Release issued on 6 October 2020, with further details included in presentations published at the same time. The proposed merger remains subject to shareholder and stakeholder approvals and it is possible that further details may be included in the shareholder circular.

Overview of the merger

The main relevant features of the transaction are:

  • Premier will acquire Chrysaor by issuing new Premier shares to Chrysaor’s existing shareholders; 
  • The enlarged group will settle debt and hedging liabilities through the payment of $1.23bn cash and a further issue of new Premier shares;
  • Premier’s existing letters of credit will be refinanced;
  • The payment to settle debt and hedging liabilities is being funded by draw down of an extended Chrysaor reserves based lending facility;
  • As this is a reverse takeover Premier’s shares will need to be re-admitted for trading on the main market of the London Stock Exchange. 

The transaction is expected, if it obtains the necessary approvals, to complete in Q1 2021.   

For Premier shareholders the main benefit would appear to be that it avoids the risk of losing their investment as a result of the significant Premier debt levels, although existing Premier shareholders are expected to hold only approximately 5% of the merger group (the other 18% allocated to Premier “stakeholders” is ear-marked for the Premier lenders).  

For Chrysaor investors the benefits are more compelling and include access to a c.$4.1 billion pot of Premier tax losses. 

Premier’s tax attributes

Prior to the announced merger Premier has been clear on its tax advantaged status due to its existing ring fence losses and investment allowances.  A significant portion of these losses were acquired on the acquisition of Oilexco more than 10 years ago. According to the announcements the parties are seemingly confident that the transaction can accelerate the use of these tax losses.

In its 2017 accounts Chrysaor had $1.5 billion of tax losses.  Published accounts of Chrysaor for 2019 show that it had current tax liabilities.  This suggests that the existing Chrysaor asset base is likely to be able to utilise the Premier pool of allowances in relatively short order. 

Interestingly the transaction that Premier announced in June with BP to purchase their Andrew and Shearwater interests will now not go ahead. There may be a number of reasons for this but in the press, Tony Durrant (Premier CEO) was recently quoted as saying:

……. the [BP] deal would have been a “good transaction” for Premier Oil as a standalone business ..However, he said the BP deal would have “diluted” the tax “synergy” created by the combination with Chrysaor.”

We understand that one of the factors which had helped facilitate BP and Premier being able to agree a deal was the ability to use Premier’s losses against Andrew and Shearwater profits. It appears, based on this statement and the merger Press Release, that there is an expectation that Premier’s tax losses can now be fully utilised by the activities of the enlarged Premier/Chrysaor group, such that the tax synergies that made the BP deal “work” no longer apply.  

In order to access Premier’s brought forward tax losses, legacy Chrysaor assets will need to be transferred to legacy Premier companies, and any incremental tax advantage will only start to accrue after such transfers.  The group will therefore need to navigate the anti- avoidance rules that can restrict the use of brought forward tax losses where there is a change in ownership. Given, the 2017 changes now mean that the anti-avoidance rule can bite if a loss maker has major changes in its trade in the five years after a change of ownership, and the statement that loss utilisation is to be accelerated post-merger, we would expect the parties to have had some engagement with HMRC on this issue. There is however no mention of this in the Press Release. 

As pointed out in our April 2020 Newsletter, HMRC have published some helpful guidance in their manuals on the application of the major change rules, and the fact that they will potentially give clearances. This has encouraged potential investees to look at acquiring companies with losses, whereas in the past, the uncertainty of the application of these rules would have led them to not even consider it. 

It seems clear that the “acquisition” of Premier would fall squarely within the category of transactions, as set out in the guidance, for which HMRC say they would not look to apply the rules: being the acquisition of a “genuine, viable and commercially carried on trade”. However it seems unlikely, given the potential value involved, that the Parties will have been content to simply rely on the published guidance.  

Summary 

This deal is another example of where a transaction can deliver value through the effective use of tax attributes. There are a number of different techniques that can be used depending on the respective tax attributes of the parties and the profile of the assets.

CW Energy has extensive experience of structuring such commercially driven arrangements and would be pleased to discuss how such techniques can be applied to your circumstances.

CW Energy LLP
October 2020


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