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Dawney & Co Delivers Letter to AWE Limited Chairman and Board of Directors

2016-10-04 06:00
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-- Questions Lone Star Rejection
-- Requests Clarification on Discrepancy in Board Asset Valuation Statements
-- Recommends Whole of Company Sale or Orderly Realisation to Stem Shareholder Losses

BRISBANE, Australia, Oct. 4, 2016 /PRNewswire/ --  

The content of the letter follows:

DAWNEY & CO PTY LTD
A.C.N. 168 708 503

4 October 2016

AWE Limited
Level 16, 40 Mount Street
North Sydney, NSW 2060
Attn: Bruce J. Phillips, Chairman

Dear Mr. Phillips,

Dawney & Co and our associates collectively own 500,000 shares of AWE Ltd ("AWE" or "the Company"). We do not deny our holding is small relative to the number of shares on issue, however, we believe initiating an open conversation with the Board to address our concerns will benefit all shareholders, small and large.

By background, Dawney & Co is an investment company focused on undervalued and underperforming public companies. Most of the time, the company in difficulty faces one or more challenges caused by both internal and external factors, such as a protracted energy price rout. Sometimes, it is necessary to take an active role in the company's affairs by proposing solutions from an "outsiders" viewpoint to the Board of Directors and our fellow shareholders. We approach every challenge in a logical and commercial way.

AWE hit our radar in January when the share price touched a 15 year low of $0.31. Familiar with the early successes of the Company, we decided to conduct deeper analysis and over the course of the year have monitored developments closely. In reviewing the Company's history, and comparing year to year, alarming trends emerged. Among other things, AWE has fewer assets, depleting reserves, reduced investment in replacing reserves and most troubling of all, the Company has written off a massive portion of past investment resulting in over $400 million in accumulated losses to date.

The Lone Star Offer:

As you well know, on 11 May 2016 the Company announced it had received an "unsolicited indicative conditional and non-binding proposal" from Lone Star Japan Acquisitions Ltd (Lone Star). The Board swiftly rejected this proposal in the same announcement as "opportunistic and not reflective of the fair underlying asset value of the Company". Truthfully, we found the rejection statement uninspiring with no information supporting the Boards decision, no mention of engaging with Lone Star and no plan for shareholders explaining how to realise the "fair asset value" in excess of the $0.80 per share offer. The market applauded the potential deal with the share price rising 16.26% on the news to finish at $0.715 (and advancing to a year high of $0.9475 on 19 July 2016).

Fast-forward to 25 August 2016 when the Company released its audited FY16 accounts, which the Board approved. These accounts disclosed losses of $363 million (including impairments). An impairment loss, as described in section 'Note 1 (D) Impairment' of the accounts, "is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount". After the Board approved asset impairment/reduction in recovery value, AWE's net asset backing (NTA) settled at $0.54 per share. This figure is somewhat lower than the $0.80 cash per share offered (recoverable) by Lone Star (however unsolicited indicative conditional and non-binding their proposal was). Unsurprisingly, the shares fell on the results (15.08%) and in the weeks following, continued toward pre-offer levels.

Questions for the Board:

1. Asset value communication-

If the Board agreed that AWE's recoverable value at 30 June 2016 was $0.54 per share, what was the rationale for deeming the $0.80 per share "opportunistic and not reflective of the fair underlying asset value of the Company"? Can the Board please clarify this discrepancy?

2. Capital decisions-

The Company has stated on numerous occasions the intention is to recycle capital, even though past investment decisions have produced accumulated losses of over $400 million. We now fear a desperate capital allocation decision to replace revenue and reserves. All else being equal, what is the Boards strategy to extract the rejection worthy "fair asset value" exceeding the $0.80 cash per share offered and when can shareholders expect payment?

3. Appointed advisers-

After the Board rejected the Lone Star offer, it appointed UBS as its Financial Adviser and Allens as its Legal Adviser. What was the motivation behind these appointments? Was it to help or hinder the transaction? What services were received, have fees been paid and, as a consequence, how are shareholders better off?

4. Director holdings-

On the date of the Lone Star rejection, Managing Director Biggs did not own a single share in the Company. Non-Executive Directors Williams, McEvoy, Betros and Penrose owned a combined 145,000 shares (as disclosed in the FY16 Annual Report). This means, under the Lone Star offer, the voting majority of the Board would have received cash consideration of $116,000 (145,000 shares x $0.80). In contrast, the same Non-Executive Directors earned $515,212 in fees and superannuation during FY16 alone and Mr. Biggs had just commenced a 3-year contract on 3 May 2016 to earn an annual salary of $800,000 including superannuation.

Were the comparative economic benefits to Directors weighed and did they factor in the Boards rejection?

Company Sale:

In our experience, management and Boards who have been unable to see value destruction coming are always poorly equipped to make judgments for a re-bound. Their ego is tied up with the way things were rather than the way things are.

To stem shareholder losses, we recommend engaging with Lone Star or opening the Company up for competing bids. Alternatively, continue asset realisations in an organised manner and returning residual capital. The Board, in control of the transaction/s, can help shareholders recoup past losses as best as possible and provide certainty in an uncertain world.

We hope to work constructively with the Board to maximise shareholder value and put our abovementioned apprehensions to rest. We look forward to your response.

Best Regards,

Mitch Dawney
Managing Director
Dawney & Co Pty Ltd

Email:
mdd@dawneyco.com.au
Website: www.dawneyco.com.au
Twitter: @MitchDawney

Source: Dawney & Co Pty Ltd
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