Proposed takeover of U.S. listed InterOil by Australia's Oil Search on slippery ground

Australia's Oil Search Ltd's proposed takeover of U.S. listed InterOil is on slippery ground after Papua New Guinea's competition regulator and high profile investors on Tuesday raised concerns over the deal.

Oil Search has become "king maker" in Papua New Guinea's (PNG) Liquefied Natural Gas (LNG) sector after striking a deal to buy U.S. listed, PNG-focused InterOil for 2.2 billion U.S. dollars in a complex transaction that will see French major Total rival U.S. giant ExxonMobil in the emerging market.

Once Oil Search takes over InterOil, it will then on-sell 60 percent of InterOil's petroleum retention licence and 62 percent of InterOil's exploration assets to Total, increasing its stake in the proposed Papua LNG to 48.1 percent, assuming the PNG government exercises its rights for a 22.5 percent share.

Despite government backing, PNG's Independent Consumer and Competition Commission (ICCC) commissioner Paulus Ain told Xinhua the regulator was not aware of the proposal until it hit media reports, flagging it may prevent the takeover on anti-competition concerns.

"We're not going against the (takeover)... it's up to both InterOil and Oil Search, our concern is that the provisions in the ICCC Act need to tested as to whether it will have substantial limiting of competition in the market," Ain told Xinhua via phone.

"All we are aware of are the perceptions floating around (in media), we don't know the level of detail that we should be able to make an informed decision."

Under the deal announced to the ASX last week, Oil Search's interest in InterOil's proposed Papua LNG project stands at 29 percent with Total the major shareholder, equal to its stake in PNG's second major LNG project led by ExxonMobil, PNG LNG, which came online late last year.

The deal also improves the chances of an amalgamation between the two projects which would prevent the wastage of money the way Australia's east coast producers have already done, potentially cutting combined costs by at least 10 percent according to local analysts. The two projects are ranked in the world's top three undeveloped conventional LNG projects, with the added benefit of being closer to Asia, the world's largest LNG market.

The ICCC has sent a letter to Oil Search asking them to clarify the deal's detail and seek PNG's regulatory approval, Ain said.

"If we are unable to give any clearance, the ICCC Act may prohibit such acquisition," Ain said, adding it depends on the fine print.

Oil Search did not immediately respond to Xinhua's request for comment.

Increasing the risk the transaction may fail, former InterOil chief executive and founding shareholder Phil Mulacek in a statement early Tuesday described the proposal as"a bad deal at the bottom of the market" that"significantly undervalues"its assets.

He also said the deals terms are a major shortfall to what InterOil had previously agreed with Total which remove 1 billion U.S. dollars in future payments once LNG production began.

"The board has sent a clear message that they do not understand how to surface shareholder value," Mulaceck said, urging shareholders to reject the deal.

The deal needs to be approved by two-thirds of shareholders, however, Malaceck and his backers only account for approximately 7.5 percent.

Mulacek has been in an open battle with InterOil's board after it advised shareholders last week to reject his director nominees as they were not in the best interests of investors.

"The incumbent board has presided over a massive destruction of shareholder value" and that the current board has allowed "management to dispose of assets at fire-sale prices," he said in a note to investors mid-May. Endit