Professional Documents
Culture Documents
Contents
Section
Page
1.
2.
Funding Options
3.
Case Study
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The Term joint venture (JV) is one of art, not law. The term itself is very vague and does not describe the actual structure
adopted or even the objectives. It merely suggests that each of the investors are to a greater or lesser extent active rather than passive participants
Likewise, there is no law of joint ventures as such and this area usually involves a mix of contract and corporate law
and in some cases concepts from partnership, equity or agency law.
Examples of joint venture relationships include mining or exploration agreements (involving an investor and an operator),
investment arrangements (i.e. involving a capital investor and an existing trading company), co-suppliers which require greater size to be competitive and gain economies of scale etc.
Allows international investors to acquire local knowledge and contacts by entering a joint venture with a local entity.
It is a means of implementing changes to a companys strategic position and spreading its financial risk - i.e. by
allowing it to concentrate on its areas of relative competence while diversifying into unfamiliar business areas.
Allows a company to deal with business opportunities in its core area of competence which are too big for it. Therefore
joint venture entities can cope with large contracts and gain economies of scale.
Very Common in Construction sector (primarily roads & bridges) where local company does not have balance sheet
In contrast to using a company or partnership structure, a joint venture is seen as having advantages in terms of greater
flexibility. Parties are free from many of the restrictions under the partnerships and companies acts. Also, as opposed to a partnership, a joint venture structure gives each party a limited liability in the sense that each party is severally liable (and not jointly liable) for its share of monies owing to third parties
Joint Ventures
Contractual JV
Governed by JV agreement
Unregistered arrangement
Unit Trusts
Partnerships
Privacy
An unincorporated joint venture agreement is a private arrangement and therefore is not subject to public scrutiny like the articles of an incorporated company. The nature of the business or the sophistication of one the parties may lead to a choice of incorporated entity. The framework provided by corporate law and additional protection available to shareholders may be preferred as an incremental safeguard to contractual rights.
Legal Protection
Accounting Treatment
Partners may prefer an unincorporated venture allowing them to keep separate accounts and maintain their own accounting policies It is easier to transfer shares to incoming parties which is a big advantage of an incorporated joint venture. Because it tends to be specific as to the parties needs, a transfer of shares is unusual once JV agreement has been reached If the parties want to use collective financing and grant security over the joint venture assets, a company is necessary. Additional shares can be issued as a way of securing further capital
Transfer of Interests
Financing
Fiduciary Relationships
Conditions to Agreement
Will include Items such as: Regulatory consents Licenses required Approval of business plans Parents Board approvals Can be set up to be dependent on: Investors equity falling below a certain threshold Listing on an exchange Completion of a specific project or a specifies date
Term of Venture
Financing
Start-up Capital typically would be Equity (subscription for shares); agreement will set out the number, class, price Can be complemented with debt financing Subsequent capital raising to be set out in share holders agreement In an unincorporated JV property is beneficially owned in proportion to their interest Profits and losses also shared in proportion to these respective interests Under an Incorporated JV, the Company itself owns the assets and JV shareholders own the shares Need to specify independent auditors who will act as experts and not arbitrators Critical to separate Management from shareholders or board oversight Contracting a management company which provides indemnity to JV in case it breaches its contracts can be useful Also useful in allowing for knowledge transfer when Management is delineated
Ownership of Interests
Auditors
Management
Mandate and structure of Management Co (Un incoporated) and Board of Directors (Incorporated) are similar Each party will have representatives proportionate to their shareholding Certain decisions can be majority and others unanimous allowing minority some veto power Matters such as issue of new shares; acquisitions or divestments, dividend payments and major amendments should require unanimous consent Key to define confidential information and obligations of each party
Confidentiality
Certain experts believe remaining silent on this point will force parties to reach commercial solution
Alternative could be to appoint an expert or arbitrator. Time consuming but better than relying on courts Other Alternatives include; Swing man Director; shot gun provisions (forcing either party to buy or sell from other party); auction system (sell shares to highest bidder) Difficult to enforce unless there is a proprietary aspect to the JV Should have an expiry period and cannot be open ended Most critical provision of an incorporated JV Issue of new shares will require consent of all and offered on a pro-rata (rights) basis Transfer of shares should have pre-emptive right Management Contracts Financing Agreements Technical Services Agreement Brand Licence Agreement
Dispute Resolution
Non-Compete
Pre-emptive rights
Additional Agreements
Funding Options
Seniority
Subordinated Notes Senior Notes (Unsecured) Senior Secured Notes/Mortgage Notes Common Stock PIK Preferred Stock Subordinated Notes Senior Notes (Unsecured) Senior Secured Notes/Mortgage Notes Credit Facilities Short-Term U.S. Treasury Bill Operating Company
Risk to Investors
10
Project Sponsor CNOOC Project Term 10 years Project Winner - Busingye Catering Partner New York Global Catering Project Capital Cost US$ 50m
Dilemma:
Busingye only has US$ 1m available for equity funding but wants 48% ownership of the JV. This implies Busingye has a funding gap of US$ 14m
11
2014 30
2015 60
2016 90
2017 104
2018 155
2019 163
2020 171
2021 180
2022 189
Total 1 141
11
8 -2 5
2.2 2.3
21
15 -2 9
4.3 4.7
32
23 -2 14
6.5 7.0
36
26 -2 16
7.5 8.1
54
39 -1 23
11.2 12.1
57
41 -1 24
11.7 12.7
60
43 -1 26
12.3 13.4
63
45 -1 27
12.9 14.0
66
47 -1 28
13.6 14.7
399
285 -12 171
82.2 89.0
2014 9
2015 13
2016 18
2017 20
2018 28
2019 29
2020 30
2021 31
2022 32
Total 209
(50) 33%
Busingyes Cash flows improve dramatically by 2018 when his annual portion of PAT reaches US$11.2m An IRR of 33% is achieved
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Pay interest and dividends with additional debt or equity instead of cash. Busingyes debt obligation will grow with interest being added to principal every year. He
pays out at the most convenient time based on his cash flows.
Illustration Borrows $14 million at 10% a year; in year 2 will owe $15.4, year 3; $16.9
million; year 4 $18.5 million
Major advantage is that it matches with Busingyes cash flow. He has a 33% return and
has no issue paying a 10% PIK cost.
Gives Busingye an option to buy-into equity when his cash flows improves in year 3 at
pre-determined valuation.
Funding Options
Key points The subject is a key debate in many mining sectors and has become increasingly relevant in the O&G sector
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Financing Options
There are multiple funding options that can be utilized to facilitate this transfer of shares in an Indigenization scheme
Ultimately, the company needs to be paid for the equity stake in the business that will pass on to employees/management
There are multiple funding options that can be utilised to facilitate this transfer
Is it deductible from cost oil? If so, the State is implicitly paying for the bulk of it Paid for by tax rates of beneficiaries?
Simple to implement Funding rate determined with reference to vendor cost Existing shareholders remain in control of the transaction and structure Gives rise to a direct cash flow impact on the business Commercial funding rate for indigenous partners Existing shareholders debt subordinated in terms of redemption and security Reduces flexibility to sustain structure but promotes independence State development banks Brazil (BNDES); South Africa (DBSA/IDC)
Vendor/Partner Finance
External Finance
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Individuals
Consortium members
Individuals
Staff Communities
SABMiller, Vodacom
Market conditions
Funding
Bank funded
7 10 years
Vendor financed
Tenor
Limited dividend flows to participants during transaction, largely option pay-off structures Cash flow
Tiger Brands, Mediclinic
SABMiller, Assore
Case Studies
Partner Funding
Key points
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Industry development records were achieved after the Jubilee discovery which made Ghana a net oil exporter
Ghana National Petroleum Corporation (GNPC) was established in 1983 and is responsible for the exploration, development, production and disposal of petroleum activities in Ghana Ghanas most successful oil story is the Jubilee field with Tullow, Anadarko, Sabre, Kosmos and GNPC (10%) having an interest in the field, with associated fields in operation (e.g. Tano, West Cape Three Points) Ghanas fiscus earns 5% royalties; a 10% free carry, an additional, paying interest of 3.75% and an income tax of 35%. Note that prior to the payment of income tax, the oil companies who incurred the expenditure are allowed a full cost recovery upon eligible development expenditure
Jubilees output has ramped up more slowly than expected. Revenues for Ghana have built up slower than expected , with various reasons cited for the cause
Jubilees development was accelerated (around 50 months from discovery to operations) with targeted production at 120,000 bpd. However, since the start of commercial operations, production has at times been as low as 63,000 bpd which has reduced revenues relative to projections
In addition to this, Ghanas Petroleum Law that allows for development costs incurred to be recovered before profits are declared, with a reported 20% return being allowed on eligible expenditure. Note that in the case of Jubilee etc, total costs are reported to amount to US$4.2 billion. Note that one of the factors behind this is that GNPC did not fund itself, but borrowed the money from its development partners (at a cost of 20% p.a.) which has to be repaid. Note that this choice has implications for control, influence and relative independence/autonomy of GNPC regarding the investment. This cost recovery has led to a P&L loss-making situation which means the government has not been able to levy an income tax (despite the field producing oil since December 2010) This notwithstanding, in 2012, the fiscus generated US$ 542 million from oil revenues of which royalties amounted to US$ 151 million and US$ 390million came from the States free carry
Partner Funding
Key points State has the right to participate in petroleum activities, bilaterally negotiated upfront
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Mozambiques petroleum law stipulates that the state has the right to participate in any petroleum activities, which is negotiated on an ad hoc basis. Practice is the State is carried during exploration and funds its participation during production. As with Ghana, there will be access to royalties and an ability to receive income tax (post cost recovery) Since 2004, Mozambique has had operational upstream and midstream gas projects:
Upstream Pande-Temane gas fields (ENH - through CMH - owns a 30% stake)
ENH has participated in onshore upstream production and infrastructure developments since 2004
Midstream ROMPCO gas pipeline (ENH - through CMG - owns a 25% stake)
ENH funded its investments in these projects through a mixture of DFI funding and partner funding. For different reasons, for example, the financing structure, ENH has similarly not seen large dividends resulting from the investments
Since 2010, the Area 1 (led by Anadarko) and Area 4 (led by Eni) consortia have made material offshore discoveries (175 Tcf gas in place to date) which are likely to mean that Mozambique will become a major natural gas producer (starting with a 10 MTPA 2 train LNG export project) Whilst the Area 1 and Area 4 transactions are still under development and will not close until 2014, there are signs Mozambique and ENH may be approaching these transactions differently:
Subsequently, ENH has partnered in world-class offshore gas discoveries (Areas 1 and 4) which will require it to make funding choices in 2013/2014
ENH is appointing independent advisers to determine how it should fund its participation in the LNG transaction (which requires the raising of up to USD 3 billion) and refinance existing deals; Mozambique has carried out a very careful fact-finding process to broadly determine its partnering and financing options, with sovereign wealth entities strongly interested in Areas 1 and 4 The Government has ensured a running yield from securing a capital gains tax take of disposals of interests in the blocks (for example, the sale of Cove Energy)
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THE END
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